Crushing debt with the Debt Snowball! An example of 10-20-70

Snowball rolling down a hill.

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You're on the path. You're saving 10% (like in Law 1 of the 5 Laws of Gold and Habit of 10%), the first step in 10-20-70 plan. Even though you feel like you're drowning, you're ready to tackle the debts with intensity.

We've highlighted 2 methods for personal debt prioritization, i.e., the snowball and the avalanche ('Rising from the Depths'). This article will use the Snowball Method and the 20% in the 10-20-70 plan. Remember, with the plan, 20% of your net monthly income will go to your debts. For this exercise, gather your non-mortgage debts, balances on each loan or debt, and the minimum monthly payments. Let's begin.

Steps for the Snowball Method	Details
Step 1	List the debts in order of smallest to largest balance.
Step 2	Use your 20% allocated monthly income. Split the 20% among all the debts. Make the minimum payments at least!
Step 3	For the smallest balance or Debt 1, pay the minimum and any extra up to the 20% allocated.
Step 4	After the debt is paid off, use the extra available from the paid-down debt to add to the next smallest debt.
Step 5	Repeat until each debt is paid in full.

Let's look at an example. You're earning $6,400/month, with a variety of debts and minimum monthly payments:

• Credit card 1: $2,500 (minimum payment = $65/month)

• Credit card 2: $9,500 (minimum payment = $150/month)

• Car loan 1: $1,300 (minimum payment = $50/month)

• Car loan 2: $18,050 (minimum payment = $300/month)

• Student loan: $35,200 (minimum payment = $200/month)

• Medical debt: $21,500 (minimum payment = $250/month)

• Total non-mortgage debt of: $88,050 (Total minimum monthly payment = $1,115/month)

Using Step 1, the debt payoff order would be Car Loan 1. In using the Snowball method, "Paying off small debts quickly can feel rewarding" (from "Comparing the snowball and the avalanche methods of paying down debt"). You get momentum by paying off the lowest balance first. The order then would be:

Prioritization	Debts!	Total Balance ($)	Min. Monthly payment ($/mth)
Debt 1	Car 1	$1,300.00	$150.00
Debt 2	Credit card 1	$2,500.00	$65.00
Debt 3	Credit card 2	$9,500.00	$150.00
Debt 4	Car 2	$18,050.00	$300.00
Debt 5	Medical debt	$21,500.00	$250.00
Debt 6	Student loan	$35,200.00	$200.00
		Total monthly minimum interest payments	$1,115

With a net monthly income of $6,400/month, $1,280/month or 20% is available for debt paydown. The current monthly minimum payments are $1,115, so there is a gap or extra up to $1,280/month. Use the remainder of the 20% allocation on Debt 1 (Car 1 in this case). The actual payments for each debt and the accelerated monthly payment for Debt 1 are shown below.

Prioritization	Debts!	Total Balance ($)	Min. Monthly payment ($/mth)	Actual mthly payment ($/mth)
Debt 1	Car 1	$1,300.00	$150.00	$315.00
Debt 2	Credit card 1	$2,500.00	$65.00	$65.00
Debt 3	Credit card 2	$9,500.00	$150.00	$150.00
Debt 4	Car 2	$18,050.00	$300.00	$300.00
Debt 5	Medical debt	$21,500.00	$250.00	$250.00
Debt 6	Student loan	$35,200.00	$200.00	$200.00
		Total monthly minimum interest payments	$1,115	$1,280

After Car 1 is paid off (in about 4-5 months), celebrate and take a breath. You're not done yet. Now that Debt 1 is paid off, add the accelerated Debt 1 payment all towards Debt 2. In this example, instead of paying $65 per month, the minimum for Debt 2 (Credit card 2), you would pay $380/month ($315 + $65).

After Debt 2 is paid, then you would attack Debt 3 or Credit card 2 with $530/mth ($315 + $65+$150). You're on a roll!! Keep going. Eventually, you'll be putting the 20% allocated for debt payments solely on the last debt. In this example, $1,280 per month to the Student loan! Once you can allocate 20% of your income to just one debt, you will feel much more able to pay it off. The results will show that you can do it!

Yes, putting aside 20% of your income every month to pay off debts is not fun. You will change your life quite a bit by first saving 10%, using 20% for debts, and then living on 70%. But it is vital to be able to get control of your income back. Then you can redirect the 20% eventually towards investments that can generate more income.

Of course, for each debt, the interest rate will increase the amount owed per month. The balances of each debt are not static, as in the example. But by accelerating the amount you pay towards each debt in a planned approach, you will quickly start getting momentum in paying off debts.

What are your debts, and have you allocated 20% to clearing them? Reach out, and we can break down allocating 20% of your income to pay off non-mortgage debts.

To your success.