A Practical Illustration of the Power of Snowflaking

Snowflaking, the practice of using small (or large) “extra” amounts of money and using those to pay down debt or increase savings/investing, is the idea of small things make a big difference in action. These small amounts can come from anywhere – earning more temporarily through another job, making things, or selling things, becoming more frugal and saving money in one or more budget categories that you previously would spend, or any other ideas you have for generating extra income or money in your budget that can be earmarked to achieve your goals. The idea that these small things can make a difference over time is sometimes questioned, so I created this example to look at what consistent changes can do over time.

Our example debt is going to be $5000, with a $200 minimum paid per month. This is the minimum that is always paid – think of it as a car loan or student loan – something where the minimum doesn’t change as the debt shrink. Although you can certainly create your own fixed minimum with a credit card, and in fact, that was one of the small steps I took that eventually got me out of credit card debt completely. In our example, we are going to look at the effect of paying simply $1 extra per week, $10 extra per week, and $20 extra per week for three different interest rates – 5%, 10%, and 20%. It might be surprising that even just $1 per week extra will end up in some cases making a noticeable difference. The data was calculated using the snowball calculator.

First, a $5000 debt with a $200 minimum payment per month at 5% interest:

  • Paying simply the minimum: Paid off in 27 months, paid $268 in interest charges.
  • Paying $204/month ($1 extra per week) : Paid off in 26 months, paid $262 in interest.
  • Paying $240/month ($10/week extra) : Paid off in 22 months, $222 in interest.
  • Paying $280/month ($20/week extra) : Paid off in 19 months, $185 in interest.

In this example, just that $1 extra per week causes the payoff date to come a month earlier than without it. Of course, the difference is more noticeable the more extra you pay, but even just that $1 per week will save you a few dollars in interest in the long run.

Now the $5000 debt with $200 minimum/month at 10% interest:

  • Paying simply the minimum: Paid off in 28 months, paid $578 in interest charges.
  • Paying $204/month ($1 extra per week) : Paid off in 28 months, paid $567 in interest.
  • Paying $240/month ($10/week extra) : Paid off in 23 months, $466 in interest.
  • Paying $280/month ($20/week extra) : Paid off in 20 months, $391 in interest.

Here, just paying $20 extra per week ends up with a payoff date 8 months earlier and almost $200 less in interest charges paid. Even paying just $10 per week extra will save you over $100 in interest in the long run.

And finally that same $5000 debt with $200 minimum per month at 20% interest:

  • Paying simply the minimum: Paid off in 32 months, paid $1382 in interest charges.
  • Paying $204/month ($1 extra per week) : Paid off in 32 months, paid $1343 in interest.
  • Paying $240/month ($10/week extra) : Paid off in 26 months, $1071 in interest.
  • Paying $280/month ($20/week extra) : Paid off in 21 months, $868 in interest.

Paying $20 extra per week, you pay off the debt almost a year earlier, and save almost $500 in interest! Even just $1 extra per week will save you almost $40 in interest charges.

So you can see that snowflakes, even small ones, can make a difference in how much interest you pay over the life of a debt. The bigger the snowflakes, the more effect they can have, but even the smallest snowflakes can speed up your debt reduction and reduce the total you have to pay.

Comments

  1. frugalwannabe Says:

    March 26th, 2008 at 10:47 am

    Great illustration! I’ve been trying to get this through to my hubby but he hasn’t quite gotten it yet. I’ll be sending this post to him today!

  2. Jeff Says:

    March 26th, 2008 at 11:21 am

    I’ve only recently discovered snowflaking. It was one of those “duh” moments when I couldn’t help but wonder why I hadn’t thought of it before. I’m sharing the snowflake idea with others and if they understand the snowball plan, they eventually come around to snowflaking. Snowflake on!

  3. Ron@TheWisdomJournal Says:

    March 26th, 2008 at 12:06 pm

    Wow. This is practical advice you can use! Great job putting this together.

  4. I’m curious again…what kinds of things did you spend your money on to get you into credit card debt? Was it ordinary household expenses or non essential items?

  5. paidtwice Says:

    March 27th, 2008 at 10:06 am

    @Jinger – a mixture of things. Some non-essentials. The vast majority was from our wedding and from my spouse’s subsequent unemployment which not only derailed our plans to pay off the wedding charges but also caused charges of its own while he was unemployed since we had no emergency fund.

  6. jinger Says:

    March 27th, 2008 at 1:29 pm

    Thanks…unemployment, illness and major life events can certainly complicate life plans. Right now an ER visit has derailed my plans and I am afraid, the credit card will be coming out once again if my emergency fund won’t cover the deductible.

    Life, you only have one and gotta live it!