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!