Snowball Loan Payments Furlo Style

Let's suppose you have a lot of debt. Some as personal loans, some as student loans, some credit card balances, a car loan, and a mortgage.

Let's just say... theoretically of course... that you and your wife have 4 student loans and 1 car loan totaling about $80,000.

What's the best way to pay off those loans?

All financial gurus agree that the best way to attack the debt is to use the snowball method: pay the minimums on all your debt, EXCEPT ONE. Put as much as you can towards that one. Really focus on getting rid of it. Once it's paid, take the amount you were paying and roll it into the next debt. As you pay off loans, the amount being paid to an individual loan will get bigger and bigger like a snowball rolling down a hill (the total paid across all loans will remain the same).

Now, there is a little contention around the order to pay off your loans. Do you start with the highest interest rate? Or the lowest balance?

It depends.

In our case interest rates are irrelevant because the difference between the highest and lowest rate is 2%. Which, turns out to be less than $100 in an accelerated payment plan. Actually, I tried all the different permutations and they all land within $300 and 6 months of each other. The real take away is this: figure out a way to pay more than required, pick a loan, and get after it. The more you pay, the less order matters.

If you care about saving money...
The technical answer is to start with the loan with the highest interest rate, probably a credit card. Then proceed to the next highest rate. Loop.

But psychologically...
It might make sense to start with the lowest balance. You get to experience paying something off sooner, and that excitement will carry you onto the next one. Plus, if life happens, you can temporarily go back to paying minimums, and because hopefully at least one loan has been paid off, you have more cash flexibility. That flexibility might be worth a few hundred dollars in lost savings compared to the other methods.

Just pick one...
I say go after the loan which bothers you the most. Who cares where it is on the list. Get rid of it. Let that excitement carry you onto the next loan. And maybe you'll get lucky: Your credit card, a really annoying debt because you can't even remember how it got that high, happens to be the lowest balance with a ridiculously high interest rate.

In our case, the biggest balance has the highest interest rate. Plus, it's actually significantly bigger than all the others. By the time we paid it off, 4.5 years later, all the other loans would get paid off within 6 months. That offered us zero flexibility, which is valuable since we're still young and prone to making drastic life changes. Plus, as you'll see, it hampers the Furlo style rewards system.

So, last January we decided to attack our lowest balance first. And yesterday, 11 months later, we paid it off fully.

Yes!

Now we're on to the next loan which is scheduled to take another year. The next 2 will take about 6 months each, the 4th will take another year, and the final loan will take 2 years (that's the big one).

But wait! There's more!

Paying Loans Off Furlo Style
Paying off loans is exciting to me, but not as much for Jessi. I mean, she gets it, but doesn't get giddy about it like I do. So, we've added rewards to the snowball method. Instead of rolling that payment over to the next loan right away, we're going to wait one month, and go do something fun with the lump sum. As we pay off more loans, the amounts are going to get bigger.

Now Jessi and I find ourselves excited to pay off the loans because it means we get to do something fun. We're even trying to find ways to tie the fun in with the loan. For example, after we pay off our car loan, we might do something fun for our cars. Jessi wants to get new carpet for the Jeep. I want to get the Jeep fully worked over so we know it'll run great for more years to come. Or we'll just take a road trip. I don't know! But I want to pay it off sooner because all of those sound like fun!

When our last loan is paid off, we're going to go crazy. I think (we're still dreaming), we'll save a month for every year it takes to pay off our loans. Right now it's scheduled to take 5 years. In our case that'll be around $6,500 (Quick! Grab your calculator and do some math!). I'm pretty sure we can think of something fun to do for that amount.

It's going to be pretty exciting over the next 4 years. We've already decided what we're going to do for this first one: A day at the spa. I'm personally looking forward to getting a massage.