Friday, September 11, 2015

Debt reduction Calculator

In my last post 1,827 Days, I gave you a 50,000 foot view of where we are and where we are going. I also painted the plan in broad strokes, but didn't give any fine detail. 

The first detail to cover is how we arrived at our 5 year plan. The first step was to amass a list of all our debts, corresponding interest rates, and monthly minimum payments. It is important to point out that we did this together. Marriage means many forms of commitments and one of those is a financial commitment to one another. We then determined how much we could afford to pay an extra amount toward our debt each month; a "snowball."

If you have never heard of a snowball approach to debt payment, it is straightforward, effective, and I highly recommend it. As a snowball rolling down a hill collects more snow and grows larger, so a snowball debt payment grows. You begin by throwing the snowball at Creditor 1. When Creditor 1 is completely paid off, you take the initial snowball amount plus whatever minimum payment you previously had to pay to Creditor 1 and apply it to Creditor 2. As each Creditor is made whole, the respective monthly minimum payment for that creditor is added to the snowball.

For instance, if I have Creditor 1 with a monthly minimum of $100, Creditor 2 with a  monthly minimum of $250, and Creditor 3 with a monthly minimum of $150. I have an initial snowball of $1000 and I start throwing that at Creditor 1 on top of Creditor 1's monthly minimum of $100. Once I have satisfied my debt to Creditor 1, my snowball absorbs Creditor 1's monthly minimum of $100 and becomes a $1,100 snowball. By the time I have paid my debts to Creditor 2 and 3, I am working with a $1,500 snowball to throw at Creditor 4, and so on. It is simple. It is effective. And, I never pay more per month than what I plan to pay today.

That said, the effectiveness of the snowball was not compelling to us until we saw what it could do for us. To figure out how a snowball would help disindebtifyTM our lives, we turned to spreadsheets. We love spreadsheets and use them for just about everything (more on that another day) so we went in search of a good spreadsheet template to help us out. We discovered Vertex42. Vertex42 has some of the most powerful and user-friendly debt reduction and money management tools you can find. Best of all - many of them are free! 

The calculator we used is Vertex42's Debt Reduction Calculator. I daresay it was almost a fun activity because this spreadsheet allows you to look at "what if" scenarios. For example, "What if we apply 100% of next year's bonus to debt?". That specific scenario changed our outcome of disindebtification by several months. By plugging our information into this calculator, we were able to come up with a plan to attack our debt. As you can see, it is fairly straightforward and self-explanatory. But allow me to walk you through it and add some of the tips I've discovered after using this tool for several months. 

Step One: Enter your debts into the Creditor Information Table. Note that while the free version has room for ten creditors, an Extended Version is available for $9.95 and allows you to enter up to forty creditors. The DisIndebteds needed this amped-up version for our debt monster. It was well worth the price.

Step Two: Determine the maximum monthly payment you are able to make against your debt. This should exceed your monthly minimum debt payment. We went with $3,900. Given our monthly minimum debt payment of $2,900, this calculated an initial snowball payment of $1,000.

I know I said we were going to pay $3,000 extra each month in order to meet our goal. I'll explain that later.

Step Three: Determine your strategy. Here's where things get interesting. You can use a simple drop-down menu to quickly alter your entire debt payment strategy. This gives you a quick summary of what total interest you will pay and a date when you will be disindebtified. I ultimately went with a custom approach, but it is based on the avalanche strategy. One nuance to the traditional snowball strategy is that you pay your debts in a smallest to largest order. This is great because you can quickly remove creditors and grow your snowball. If you are the type of person that needs to witness immediate results, I would recommend this approach. For the DisIndebteds, the avalanche strategy works best. This works by paying the highest interest rates off first. If you have a mix of high and low interest debts, this may be a preferable plan and will save you a lot in total interest.

That's it! Now all you have to do is follow the plan and make the payments. 

But as I said, there is more. The second tab of the worksheet provides a full payment schedule. In this tab, you can see the specific details of each creditor along with the exact payment you should make to that creditor each month. 

However, it also includes a very cool feature in Column D; the "Snowflake" as Vertex42 calls it. This allows you to specify one-time extra payments that you make above and beyond the normal monthly payments. 

The DisIndebteds prefer to think of these snowflakes as snowstorms. We take every extra dollar we have above and beyond our $1,000 initial snowball and hurl it at the debt as often as possible. Cash wedding gifts? Stuff we sold on eBay? Refunds on beer purchases? We threw it all at the debt. 

We throw every extra dime we have at our debt.

This is where we find much of our average $3,000 a month. 

Some months have three paychecks instead of two. Employer bonuses come out in January. Tax refunds come back in the spring. All of this adds up to a constant snowstorm on top of the avalanche debt payment. The best thing is, the longer we have done this the better we get at finding extra money. And we get more and more excited as we go along and watch our plan in action. 

In my next post I'll talk more about how and where we are finding extra money each month.

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