This section describes the different strategies that you can choose within the debt snowball spreadsheet. Each of these strategies has to do with the order that you target your debts with your snowball. Unless you choose the "No Snowball" option, ALL of these strategies make use of the snowball effect described above. For more information, see Dave Ramsey's article on the debt snowball effect , or read his book, "The Total Money Makeover".
If you choose the "Lowest Balance First" method, and two of your balances are roughly the same amount, but have very different interest rates , you might want to switch the order that you pay them off so that you pay the higher rate first. It might not make much difference in how long it takes to pay them off, but it could make a difference in how much interest you end up paying.
To use this approach in the worksheet, you'll need to choose the "User-Specified Order" methods described above. The stair-stepper strategy, integrated into the Google Sheets versions of the debt reduction calculator, was devised by Carlotta Thompson carlottathompson.
Beginning with the lowest balance category, you pay off the debts from highest to lowest interest rate, then move on to the next higher balance category. As you pay off debts, your net cash flow increases, and that extra cash is what causes your debt snowball to increase. Credit cards are typically the first debts to pay off because of their high interest rates, but cash flow is another reason to target the credit cards first.
A credit card payment is usually calculated as a percentage of your balance. That means that as you pay off your credit card balance, your minimum payment decreases. To see how that works, download the credit card minimum payment calculator. Unfortunately, the debt reduction calculator only assumes a fixed minimum payment, so you don't see the debt snowball gradually increasing as you pay off credit cards.
But, if you are concerned about cash flow, remember that paying off credit cards or other debts with a decreasing minimum payment gives you an immediate increase in net cash flow. On the other hand, most auto and home loans have fixed payments.
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So, you don't see the increase in cash flow until the entire debt is paid off or if you refactor the loan to lower the minimum payment. A decrease in liquidity is a risk because it reduces your ability to pay unexpected expenses or to make a timely investment. As you make payments on your credit card or other lines of credit, the liquidity risk is lower because you can quickly withdraw the money again if necessary assuming your credit isn't frozen.
That would increase your debt, of course, but it lowers the risk of being unable to keep the electricity running.
On the other hand, if your extra cash is used to pay off an auto loan, you can't just get another loan in a couple of hours. What does this have to do with your debt snowball strategy? It is just another reason why you may want to customize the order that you pay off your debts. Warning: It may be tempting to put your full financial strength into paying off your debts. Be careful about doing that. You need to balance your debt reduction goals with the need for an emergency fund and other important financial goals.
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In these cases, it can be useful to seek the advice of a qualified professional. Help us help others break free from the bonds of debt by spreading the news about this free debt reduction tool. Investopedia defines it here:. Using the debt avalanche method, once the debt with the highest interest rate is completely paid off, the extra repayment funds go toward the next highest interest-bearing debt. This process continues until all the debts are paid off. But, we are emotional beings and even the most disciplined among us still have emotions and are affected by them.
Humans do not. We were not created to. We make decisions based on our emotions. We get let down, we get encouraged, we feel motivated, we get scared, we feel hopeful, we feel like quitting. These are all emotional states that each one of us could feel on any given day!!
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Knowing that we are emotional beings, the key is to use our emotions to our advantage. Just like jogging with the wind at your back, it is a nice little boost to use our emotions to give us a little edge.
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So, rather than tackling the debt like a math problem, we can tackle it in a way that will give us emotional boosts! Ever wonder why there are status bars showing you the progress of the item you are loading on your computer? It is to keep us from going crazy while waiting 10 minutes for the computer to do what we told it to do!! Even though that little bar moves slowly sometimes, it is encouraging because we know how much longer we have to endure the torture of waiting. It is extremely DE-motivating when there is no end in sight. You will need to know the principle and interest you will pay for each loan for over the course of several months.
You can play with making extra payments to see the effect in the Totals sheet or on the graph. Fill in details for each of your debts in the Datasheet for each month, then you'll see the total principal and interest paid each month and you can use the graph to see when you'll get out of debt. This spreadsheet includes a worksheet called Print which shows a breakdown of monthly and daily interest paid in huge red letters. The idea behind this is to print out that page and put it somewhere where you will see it often, like the refrigerator, to remind you of your goals and progress.
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