Debt Reduction Exercise for Personal Use
In Start up or small business we off end up with various debts , we have to use our cash flow wisely to repay debt , this exercise will help you for the same .
Step 1: Complete the Creditor Information Table. Read the section "Using the Debt Reduction Calculator" on the above web page. Look for more information about each column in the table header's cell comments.
Step 2: Enter a Total Monthly Payment. See the cell comment for more information.
Step 3: Choose a Payoff Strategy. The various strategies are explained below.
Debt Reduction Strategies
Lowest Balance First: Gives you the benefit of the snowball effect, but you may pay more interest in the end than Highest Interest First. The main benefit of this approach is the psychological effect of seeing the number of debts disappear more quickly.
Highest Interest First: This strategy results in the lowest total interest, but depending on the balance of your higher interest loans, it may take you longer to see your first loan/debt completely paid off. If the difference in the total interest is not significant, than you may get more satisfaction from the Lowest Balance First method.
Order Entered in the Table: You can use the sort feature (Data>Sort) to choose how you want the snowball effect to work. For example, if you want to use a combination of Lowest Balance First AND Highest Interest First, then first select the creditor information table (B7:F17), then go to Data>Sort, and sort by Balance:Ascending and Rate:Descending (or vice versa).
Warning: If you are careful, you can rearrange the order of the entries in the creditor table by copying or cutting and pasting, but if you insert a row above row 1 or after row 10, the formulas will be messed up.
No Snowball: Select this option if you want to see how long it will take to pay off the debts without maintaining a constant monthly payment. In some cases, you may find it will take more than 30 years (resulting in errors in the spreadsheet).
Custom-Highest or Custom-Lowest: You can manually control the order the debts are paid by entering numbers or formulas in the Custom column. For example, if you enter the values 1,2,3,5,4 then rows 4 and 5 will be swapped. You can enter your own formulas as well, whatever they might be.
Other Tips and Information
Minimum Payments: This calculator does not provide the option of making only the minimum monthly payments on credit cards or lines of credit. See tip #3 below.
Tip 1: If you want to use the Lowest Balance First method and you have two debts that are close to the same balance but have very different interest rates, you may see a substantial reduction in the total interest paid if you change the order of the two entries so that you pay the higher rate first. In that case, try using the Order Entered in the Table strategy.
Tip 2: Like Tip 1, if you want to use the Highest Interest Rate method, and you have two debts with similar rates but very different balances, you may want to change the order so that you pay off the lower balance first. This may make very little difference in the total interest, but it can make you feel better faster.
Tip 3: Update the Creditor Information Table every few months. Your minimum payments may change over time as the balance in your accounts change, or if your interest rate changes. You may be able to further reduce your overall interest and reduce the time to pay off your debts, by re-adjusting your minimum payments every few months. This would mean starting over with a fresh template, entering the new Balance Date, and updating the Creditor Information Table.
Tip 4: Snowflaking is a popular term for making occasional extra payments above the normal monthly payment. You can add debt "snowflakes" in the PaymentSchedule worksheet.
