It’s been a little while since I’ve written about snowflaking. After Micah and I discussed the future of the car loan repayment plan, I thought I’d address the actual logistics of snowflaking. First, here’s a brief overview for those unfamiliar with the subject.

What is Snowflaking?

Snowflaking is a debt-repayment process popularized by Paid Twice. It involves not just designating a certain extra amount to be paid towards a loan every month (a debt snowball) but finding little ways to earn or save more money which can then be applied to the debt.

If I owed $250 minimum on a loan, I might budget that $250 and then look for ways to earn money through surveys, blogging, odd jobs, consulting…whatever brought in money that wasn’t already budgeted for. I would also snowflake through saving money in sections of my budget. If I spend $10 less on groceries, it’s a snowflake. If I earn $15 online, it’s a snowflake.

Of course, you can also use this process to save money, just put the snowflakes in their own account.

What Matters is When and How You Send Them In

Well, the next question is—when and how are snowflakes applied? It would be easiest to simply send them in as you get them. You might want to send them in as they arrive or at the end of every week…or at the end of every month.

However, there are two important questions you want to ask. First, “Does my card/loan allow extra or pre-payments?” Second, “Is there a special way I can designate this money so it goes straight to the principal?”

Prepayment / Multiple Payments

Some loans actually charge you money if you pre-pay. If you ever take out another one (especially a mortgage) ask about this right up front. You never want a loan that does that to you. If you have one now, talk to your lender about options.

With credit cards, there’s another possible problem. Many allow you to pay online and you can even pay off any purchase as soon as it posts. But some have a rather anal billing system. For example, Lynnae sent in her credit card payment a little bit early and got hit with a fee and a raised APR. Not cool.

So, because credit cards always work in their own best interests (they think, anyway), I would recommend playing it on the safe side and not sending in your snowflake until you make your whole monthly payment. That way, the system won’t confuse your payment with next month’s or misapply it.

Applying to Principal

Suppose, again, that I have a car loan which is $250/month (something similar to the minimum for ours). Because it’s a fixed-period loan, the creditor has already figured out how much interest we’ll be paying on it. Let’s say that the loan was $8000 for 4 years at 6% interest. According to my calculations, we’d pay $9018.24 on it. That’s $1018.24 in interest.

So the creditor has this all worked out. To them, our loan isn’t really $8000, it’s the $9018.24 they’ll get back.

If we send in $300 this month in our monthly online payment, there’s nothing to say that they won’t apply the extra $50 towards the balance on the $9018.24 instead of towards the balance on the $8000.

That’s their right, since you haven’t told them otherwise. But while you can still pay your loan off faster this way, you may be able to pay less overall by finding out how to apply your snowflakes to the principal.

It’s necessary to call your lender and ask “Ok, how do I make my extra payments apply to the principal of the loan?” It may be something as simple as mailing the checks in whenever you want, but marking them “apply to principal.” It’s possible they have an option for doing it online (some let you pay online but only apply to principal through checks).

Calling sounds like a headache, but if it can you money, it’s certainly worthwhile.

Wrapping It Up…

Snowflaking is a great method for repaying debt faster. It’s also very encouraging to see all the little flakes build up into a snowball. $15 you didn’t use from your grocery budget doesn’t sound like much, but combined with $10 from your gas budget and $20 from your eating out budget, you’ve got $45. Now if you earn $20 extra through little things, you’ve got $65. That’s a nice solid amount.

To make your snowflaking as efficient as possible, find out when and how to send it in!

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Kacie August 1, 2008 at 12:13 pm

Excellent post! Snowflakes are incredible if you apply them toward savings or debt, and don’t just spend them.

I’ve been keeping track of my snowflakes to make sure they go where they need to go, and I’m amazed at how much they add up!

Francois August 1, 2008 at 3:42 pm

This is an excellent post.

I’ve heard of snowflaking, but this is the first time I actually took the time to read what it’s all about. I love the idea, it’s very powerful, and I saw it in my own life. Although I didn’t know I was snowflaking at the time. 🙂

You also covered a lot of basic and extremely helpful tips, e.g. paying to the principle if possible, saving up otherwise. I think the thing to note here is – always understand your loan agreement, read the fine print.

Well done, thanks, and keep it up.

Bonnie Sayers (autismfamily) August 2, 2008 at 1:43 pm

I never heard this term before and really enjoyed reading this and learning techniques. I have one credit card that charges a fee if you pay online. The fee is added to your balance and not added to the payment amt. I now have a car loan and paycheck is direct deposited the day before that credit card is due and with the car loan taking a bite out of my budget I cannot send the payment in ahead of time anymore.

I have paid the min before due date on a few cards and then later in the month did my actual payment.

One card I have is a union card and for one year now no interest, but starting in Dec they will charge interest and they have a skip a month option that I have used. What is the best way to handle this card with the interest starting in a few months vs others always having interest? I am using that card more often now.

My FICO score dropped a lot after car loan and cannot even try to get a lower rate. I had a bankruptcy in 2004 and my rate is 9.5R% with capital one.

They do have info about the car loan and paying ahead and can only do three months otherwise mail it to them with note on where it is to be applied. The site has another amount to see if you want to pay it off by a certain date.

My problem now is CA Gov just cut my pay due to budget cuts, and when it is all done we get money back, so I want to save that for payments on cards.

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