27 October 2008

Debt Reduction Calculator

I found this nifty (and FREE!) little doo-hicky online the other day and thought I'd pass it along:

http://www.vertex42.com/Calculators/debt-reduction-calculator.html

Actual Screenshot:

It's a debt reduction calculator (spreadsheet available in Excel and Open Office friendly formats) based on the "Debt-Snowball" strategy. So I'm a bit new to the strategy, but basically it involves calculating how much of your income you can put toward bills a month, paying minimums on all revolving debt EXCEPT for the lowest amount, which you devote the "snowball" or minimum plus excess budgeted debt repayment amount every month until it's gone. Then you move to the next lowest debt, and so on.

(I know, I just made that sound hella complex. For a more thorough definition, try here.)

Apparently, lots of financial planners recommend this strategy for a couple of reasons**:

1. Paying off debt a lot more quickly and/or paying less interest overall* depending on how you structure the snowball effect.

2. Psychologically, this strategy is more rewarding than others. Because the payment effort is concentrated on paying off one bill at a time (aside from meeting the other minimums), it's possible to see results sooner (i.e. fewer bills overall). Since success encourages repetition - a sort of Pavlovian response I suppose: the reduction in number of bills becomes the strategies own reinforcing reward.

In any case, I've been informally doing this kind of debt payoff for the last year. Although, I confess it hasn't been really well organized. I tended to throw my snowball at whatever bill just FELT most pressing that paycheck. As a result, my efforts haven't been as efficient as they could have been, although I have substantially reduced my overall debt this year by about 40%. After putting the spreadsheet through it's paces (somebody smarter than me is going to have to check the math on this one) I'm really pleased to have a single place to store, track and set some goal payoff dates, as it gives me some focus.

Also, the spreadsheet gives LOTS of options for how to set up the snowball strategy: highest interest, lowest interest, greatest balance, lowest balance, etc. and a cool dropdown that calculates how much interest and how long it would take to elimiate the debt using each stratgey. I peeped out a few other spreadsheets and this one just worked best for me.

Anyone else using a similar spreadsheet? What do you recommend? Built your own?

What's been your experience with the Debt Snowball Strategy? Success stories? Caveats?









*Infact, if you have good financial discipline (which I am developing), an alternate strategy is to structure the snowball payoff by highest interest rate - thereby reducing



**(Disclaimer: Please be aware I am neither a psychologist or a financial adviser, so anything I say here is purely my own speculation based on research and trial and error. Don't fuck up your finances and blame it on me. Consider yourself warned.)

3 comments:

Strange Bird said...

$4900 student loan at 4%? Obviously whoever made the screenshot was not a law student. :) Or was, 25 years ago!

Rosie said...

Heheee...

Gotta love the sample data, right.

Rosie said...

Reminds me of the language lessons I'm using:

In one coversation regarding how many pesos or dollars each party has (where they are located and where to be spent - who REALLY talks like this anyway?)

#1 says: "No Tengo pesos pero tengo dos dollar."
#2 says: "Esta bien. Tiene muchas dollares."

As I'm carefully repeating pronunciation, I realize what I'm saying and the thought strikes me:
Two bucks? Even in Mexico that won't get you far these days. Maybe 25 years ago :-)