My Debt, How I’m Paying It, and the Snowball Effect

For the first time, I am going to give exact details on my loan balances and how I am paying them off.  I will also discuss the popular “snowball effect” for paying off your own debt.

My Debt Today

I have three loans with balances.  My car loan has a balance of $4,175.51 at 5.95%.  My unsubsidized student loan has a current balance of $2,698.57 at 6.8%.  The subsidized portion has a balance of $8,500 with no interest until after I graduate.  I have been paying far above what I need to for each of those loans to have them paid off quickly.

I pay my loans automatically.  According to the snowball theory, which I will describe in more detail shortly, I should be paying as much as possible into the 6.8% loan and a minimum payment in the others.  I am not.  I built my own plan.  I make payments into the two interest bearing loans automatically twice every month.  I don’t even have to think about it anymore, my bank does it for me.

I pay $150 every two weeks into the student loan, which is still growing quarterly.  That $300 per month is well above the interest only recommended payment of just under $20 per month.  I am not required to make any payment until six months after graduation, but I would rather pay as I go and graduate with less debt.

I automatically pay $170 per month into the car loan for a total of $340 per month.  I picked this number because, at that rate, I will have the five year loan paid off in three.  The initial loan was for $10,995 in August 2007.  I was paying double the $210 monthly payment until I started school.  I lowered my payment to ensure I had enough cash to make significant progress on the student loan while in school.

At the rate of payment above, I will have my car paid off when I graduate and will have the entire non-subsidized portion of my student loan paid off when the subsidized portion kicks in.  That will leave me with one loan requiring about $200 per month minimum payments.  I hope to pay it off twice as fast and be done with it 5 years after I graduate.

Debt Snowball: How It Works

So, how does the snowball effect work and why am I not exactly using it?  I am so glad you asked!  Here goes:

Lets say you have 3 loans.  One has a balance of $5000 at 4.9% (minimum payment is $150), the second has a balance of $1000 at 5.9% (minimum payment $50), and the third has a balance of $3000 at 7% (minimum payment $100).  Which do you pay first.  (Please take this time to formulate an answer before reading on.)

If you said the third loan, you are right.  The smartest strategy is to pay for the highest interest rate loan first.  It doesn’t matter what the minimum payment is.  It doesn’t matter what the balance is.  All that matter is how much interest you pay per dollar.  There are psychological reasons to pay the 5.9% loan down faster, as it will be paid off quicker.  However, in reality, we should pay for the highest interest rate first.

Why am I not doing that?  The psychological reason.  My student loan is growing and will keep growing until I graduate.  My car loan is fixed and shrinking.  I want it to be over.  That is why I pay more into a lower rate loan.

The snowball effect is, surprisingly, not related to that famous scene in the movie Clerks.

Start Your Own Debt Snowball

Snowballing, for loans, means you pay the minimum payment on all of your loans except for the highest interest. You pay as much as possible into that loan. Once it is paid off, rather than just lowering how much you put into loan payments, you put all of that into the next highest interest rate.  In the example above, you make the $50 and $150 minimum payments while putting $200 into the highest interest loan.  Once it is paid off, you just start putting that $200, in addition to the $50 minimum payment you were already making, into the 5.9% loan.  Once it is paid, you put the whole $400 into the 4.9% loan.  That is the fastest way to pay down all of your debt.

I am happy to give you one on one help if you are trying to set up a plan like this.  If you send me your details through the contact form, I will put your plan together, in a spreadsheet, for free.  I just ask that you let me share it, anonymously if needed, on this blog as a feature about how one real live person is going to do it.  Most financial advisers would charge $100 or more an hour for this.  Remember, I have a finance degree and I am working on an MBA, so I do really know what I am doing.

If you were confused by any of this, please let me know in the newly fixed comments.  I can answer any questions, about my situation or snowballing, in the comments.  And no, I don’t like what they talk about in the video. If you are creating a new debt snowball today, this free tool is a huge help.

Update: My car loan is paid off!

Update 2: My student loans are now paid off!

Photo Credit [1]

6 thoughts on “My Debt, How I’m Paying It, and the Snowball Effect”

  1. My wife has $18,500 consolidated school loan with Navient… We’re paying the base $236 a month (which covers interest and some principal), then I pay a 2nd payment of 200-500 (depending what we can afford that month) as a full principle payment…

    Should I space out my 2nd payment mid-month or should I just continue what I’m doing?

    We started at 34,000…

    Thanks for the input!?

    1. Hi John, that is awesome progress so far!

      Being as far ahead as you are and making such big extra payments, there is probably not a huge benefit to changing which day each payment hits during the month. The earlier the better for each payment is financially beneficial as far as the math goes (though over time won’t add up to a huge amount when you are making consistent extra payments).

      However, if what you are doing is working well and you are ahead of things, there is no reason to fix something that isn’t broken. Keep up the awesome work! You guys will be debt free in no time!

    1. Hi Noah, I spaced them out to match my payday at work with my expense payment dates. By spacing them out, I could pay on the same schedule that I earned, which also saved me a little money on interest and helped lead to an extra full payment each year – 26 paydays = 13 months.

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