Example of Debt Snowball

Jack and Carol Thompson are unpacking their luggage from a weeklong trip to see Jack’s parents over Christmas break. They hear their two boys screaming and playing their new toys. Snow is falling as if it were the opening scene of a Christmas movie. Unfortunately, Jack and Carol do not share the same excitement as the boys. They have the post-shopping blues.

Once again, the Thompson’s failed to read the piece of mail marked “Attn: Christmas will be in December this year!” So they were left with two options; don’t get the kids any presents, or get the kids anything they wanted because they have a credit card. They chose the latter because they’re “good parents”.

Jack and Carol are normal. They have a combined gross income of $100,000. They live in a modest house with a 30-year mortgage. They drive modest cars which they finance. They have student loan debt. They usually have a couple credit cards with outstanding balances. Jack has a balance left at Home Depot, and Carol has a Target card “in case of emergencies”.

Jack and Carol both knew something needed to change as they unpacked their luggage. The boys were filled with joy. Jack and Carol were filled with guilt. They had not made any financial progress sense the youngest was born. They were living the exact same life as they were seven years ago.

Jack and Carol decided to take control of their future. They were disgusted they were living like everyone else. The boys deserved better role models. Jack and Carol deserved better lives. They wanted a better marriage. They wanted peace of mind knowing they were financially fit and prepared for the unexpected.

×Become Disgusted

×Create a Budget

Jack and Carol put the boys to sleep early and sat together to create their budget. The keyword was “together”. They didn’t agree on every detail, but they didn’t go to sleep until a compromise was reached.

They included all necessary monthly expenses of food (groceries), shelter, clothing, transportation, and debts. They started budgeting for once-a-year expenses such as Christmas and insurance. They each got $20 a month to spend on whatever they like, and put another $50 aside to use as monthly “fun” (going out to eat, going to a movie, etc.).

Having a written plan excited them! They were ready to have their best financial month of their marriage!

×Save $1,000 (or empty your bank account to health insurance deductible if…)

Jack and Carol did not have much money in savings – only $5,000 in liquid cash. If each family member met their deductible in the coming year, it would cost them $10,000. If they keep the $5,000 where it is and the family gets sick – it’s a financial emergency. If they put $4,000 of it towards debt and the family gets sick – it’s still a financial emergency. Jack and Carol did not have an option but to empty their savings.

The Thompson’s worst case scenario is if all four members needed costly medical care. In that case, they would have to go back into debt. Thus, by doing nothing, they are living their worst case scenario!

Note: If the Thompson’s had $0 in savings, there first step would be to save $1,000. But since they had some savings, they used all but $1,000 to put towards debt. The end result is the same – $1,000 in savings.

×Stop adding to your debt

Jack and Carol both agreed that debt was no longer an option, and were committed to following the budget. The budget they put together!

×Stop investing into retirement

They stopped their monthly IRA contributions to free up additional capital to put towards debt.

×Use the debt snowball

The next day there were ready to plan their Debt Snowball!

  • They listed their debts from smallest to largest

Debt Snowball

Note: Jack and Carol had 5,000 in savings. Once they take out $4,000 and put it towards their debt, leaving $1,000 as a small emergency, the list will get shorter. That $4,000 will immediately pay off Target, Home Depot and MasterCard debts ($635 + $1,200 + 2,165 = $4,000).

Here is the list of debts at the beginning of their Debt Snowball:

Debt Snowball

  • Pay the minimum payment on every debt except the smallest debt on your list


  • Determine how much money can be put towards your initial Debt Snowball

After the January budget was complete, they decided it was doable to put an additional $300 a month towards debt. This was their initial Debt Snowball.

Here is how the Debt Snowball works:

The Thompson’s pay minimum payments on all debts except for their Visa balance. Although the minimum payment on the Visa is $35, they will actually pay $335 a month ($35 minimum payment + $300 initial snowball) towards Visa debt. It will take a total of $2,919 (including interest) over nine months to pay this off. The Thompson’s will only have three more debts.

Debt Snowball

It’s now October, and the Thompson’s are ready to start attacking the next debt on their list – Jack’s student loan debt. Instead of paying the minimum of $225, they are now going to pay $560 a month ($335 + $225). It will take a total of $7,641 (including interest) over 14 months to this off!

After 23 months they are down to only two debts! Carol’s car will be paid for in another 16 months with a monthly payment of $940 ($560 + $380).

After 39 months they are down to one debt! Jack’s car will be paid for in 12 months with a monthly payment of $1,275 ($940 + $335).

They are finally debt-free after 51 months!

Notice the Thompson’s paid $1,275 every month, regardless of how many debts they had outstanding. As time went on, it got easier and easier to get out of debt because their snowball kept growing and growing.

It took a little over four years to become debt free assuming they did not put any additional money towards the debt (besides the $300 initial debt snowball). Put another way, it took 4 years while doing nothing else besides following the Debt Snowball method. There are plenty of ways to speed this up if you look!

  • Keep finding money (not included in the math above)

Jack had some tools he didn’t use. He sold them. Carol had some purses and high-heels she never wore. She sold them. All proceeds went towards the debt!

  • Stay the course

Day after day, month after month, they plugged along. Every month they made a budget. Every month they followed the budget. Every month they got further and further away from debt and closer and closer to financial fitness.

×Build wealth

The first step in building wealth is creating an emergency fund; typically 6 months of monthly expenses. The Thompson’s don’t ever want relive their last 51 months of battling debt. An emergency fund will ensure this never happens again.

Now comes the fun part! They can start building wealth. They can start investing and building a nest egg. They can start saving for the boys’ education. They can start vacationing without guilt. They can start to save for their next big purchase. They can increase their tithe to the church.

They follow a budget every month. But instead of budgeting to find ways to reduce their debts, they now budget to find ways to leave a legacy. They want to be good role models to their children. They want to show their boys how money is a powerful tool. “Money is like a hammer”, they tell them. “It can be used to smash your hand when you’re not paying attention (unfulfilling life), or it can be used wisely in conjunction with other tools to build a house (fulfilling life).”

Jack and Carol used to be normal. Now they are weird. They like being weird!

Let’s review the math:

It would take Jack and Carol 20.2 years to pay off this debt if they only paid the minimum payments each month (assuming they took on no other debt).

By using the Debt Snowball, even without the $300 initial snowball, they could become debt-free in in 15.8 years. By just adding an extra $300 a month, they reduced that time even further to 4.3 years. That’s over 11 years sooner! All because of $300!

Still not convinced it’s important to be debt-free? Let’s pretend Jack and Carol magically did not have debt. They instead took the $1,275 they paid monthly while getting out of debt and invested into a decent mutual fund for the same period it would take them to become debt free paying only minimum payments. How much money would you have in 20.2 years while receiving a modest return of 10%?


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