How does one get out of debt? The first step is to figure out where your money goes. Having the freedom to choose means that we sometimes make unwise choices. This article on budgeting details crucial steps for you to take to regain control. If you haven’t, yet, read it now. The steps of working up a budget can take 3-4 hours, but can be very empowering, because it can help us correct ourselves.
If you took the challenge from the first part of this article, you have prepared a list of creditors, total amounts owed, minimum monthly payments owed them, and the time to payoff with minimum payments.
The Budgeting Challenge you completed from the article on Budgeting revealed your income versus expenses. Because we didn’t include debt repayment, other than home and vehicle, in the exercise, there should be a sizeable difference, positive and in your favor. The difference in your income and expenses is the amount you apply to your debt snowball.
A debt snowball is the conscientious effort, and money, you put toward eliminating your debt. You take the money you have from your budget to pay debt and apply it toward minimum payments on everything. Then you take any amount that is left over, even if it is less than $1, and apply it to the loan with the smallest amount. All of it. Every month, until that smallest loan is paid off. Then comes the exciting part! You have one less debt AND the amount you had been paying on that loan available now to apply to your next smallest loan! You continue adding that now-freed-up amount to the next loan until it, too, is paid off. Then you take that amount and apply it to the next smallest loan. See why it’s called a snowball? That little extra you can apply to a payment then gets bigger each time your smallest loan is paid off. And bigger payments, mean shorter times paying on the loan. When you continue with this disciplined approach, you’ll soon be debt free AND have a large “snowball” to use to prosper.
Take the Challenge… Complete the steps outlined in this article. It can be really encouraging to put these numbers into a spread sheet to calculate how much your debt is reduced each month and the speed with which it happens. Finally being debt free is an amazing feeling!