FAMILY BUDGET

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School

University of Phoenix *

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130

Subject

Finance

Date

Nov 24, 2024

Type

docx

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Uploaded by PresidentLightningAardvark11

Student Name Course Date Family Budget: Part 2 The debt snowball method is a debt reduction strategy where debts are paid off from the smallest to the largest. Once the smallest debt is paid, the installment of that debt s rolled over to the next-smallest debt payment. This type of debt payment provides momentum as the debtor knocks out each remaining balance. This paper discusses the payment of the debt in the case of the Wanda and the Vision family. The family has five categories of debt. These include two cars belonging to Vision and Wada, a credit card loan, and a student loan for each of them. From the recommended percentage worksheet, debt took up 18.85% of the family’s monthly expenses, which is about $1,727. This rate is very high, which led to a recommended reduction to 13% to allow accommodation of other family needs and balancing off their finances. Based on this recommendation, it is evident that the family’s financial case study contributes to the initial snowball amount in that the amount must consider other expenses that the family has in relation to their income. The new monthly payment of the family will be: Total monthly payment + Initial snowball amount The total monthly payment is $1727, while the initial snowball amount is $(937). Therefore, the new monthly payment is $790. Using the lowest balance method, the family will first eliminate the credit card debt, which has a balance of $7,500 at a rate of 24% and a monthly payment of $160 monthly. This will take 126 months to be paid off, starting from June 23, 2023. The paid-off month will be

December 2023, while the total interest is $14,498.21. The second debt to be paid off will be Wanda's car loan, whose balance is $13,150 with an interest of 4.5% and a base payment of $300 monthly. The family will take 48 months to pay off this debt, and hence the paid-off month will be June 2027. The accumulated interest rate will be $1,242.95. Vision's car loan will follow, whose balance is $18,850, with an interest rate of 4.5% and a monthly payment of $430. The payment will last up to June 2027 and will have accumulated interest of $1,781.93. The next loan to clear will be Vision's school loan which has a balance of $35,000. The family will take 145 months to clear, which is up to July 2035. The accumulated interest will be $18,421.64 with a monthly payment of $305. Finally, the family will clear their debt of student loan, which has a balance of $50,000. The accumulated interest is $13,770 and will take 120 months to clear off. I would prefer this method to pay off debts. This method is appropriate since it is a good method to plan how to repay debts while keeping you accountable. Also, it provides motivation as one looks forward to clearing the next debt after clearing the previous one. However, my decision would be influenced by the total accumulated interest rate. For instance, if Wanda and Vision decided to use this method, they would have incurred an interest amount of $49,517, which is very high. This is because while you start with paying off the debt with the smallest amount, one is holding onto the debts with the highest amounts and are likely to attract high interest for the longest period. This increases the payable interest rate, which may not be a wise decision financially. Therefore, my decision to adopt this method is dependent on the amount of the accumulated interest rates.

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