This post is a quick follow-up to my previous post on debt snowball: Why Getting Out Of Debt Should Be Your Number One Prep: How To Do It Using The Snowball Method.
I came across a nice little spreadsheet, or debt reduction calculator, with some built-in formulas. It asks for your current debts, balances, interest rates, and minimum payments, and then lets you choose from several different payment strategies. You can compare each strategy to see how long each will take, as well as how much interest you will have paid, and decide which works best for you.
For example, I created a list of 5 debts of varying amounts and interest rates (with a 4% minimum payment amount), like this.
The debt reduction calculator then asks for your monthly payment – this is the total of your minimum payments plus any extra you are able to put towards the snowball. You can then choose the strategy you’re going to apply. To start, let’s see what happens if you don’t use the snowball strategy and just pay the same minimum amount every month.
You’ll pay off all the debts in a 3 to 8 year period, and pay just under $8000 in interest. Now, one thing to keep in mind here is that this formula assumes you’re paying the same amount every month to each debt, even after your minimum payments have dropped. If you drop the amount you’re paying every month, then you could easily double (or more!) the amount of time needed to pay off the debts, and the amount of interest paid will climb as well.
Now, let’s try paying them off using the snowball method. This way, everything is paid off in 1 to 3 years, and you pay just under $4000 in interest – a savings of $4000!
Now, let’s try the debt avalanche method. This is where you pay off the highest interest rate first, rather than the lowest amount. The numbers don’t come out much differently; you pay about $14 less in interest, and everything is paid off around the same time. Depending on your real situation, you could see a greater savings here, but in this case I’d probably stick with the snowball method just for the psychological boost.
Finally, you can manually play around with the order the debts are paid off. If you have two debts that are close to the same balance but have very different interest rates, you may see a substantial reduction in the total interest paid if you change the order of the two entries so that you pay the higher rate first.
You’ll probably want to update your balances in the calculator every six months or so, just to be sure you’re still using the best strategy.
This calculator is available in both Microsoft Excel and Open Office format, and is completely free. You can download it here.