Debt is a huge stressor for many people. Car loans, school loans, medical bills, home loans and high credit card balances are overwhelming. Couple that with our current economic environment, and the financial strain can be unbearable. To reduce your stress, work to eliminate your debt and take control of your finances.
Getting out of debt is imperative to finding financial freedom. The debt snowball is a debt-reduction strategy that you can use to pay off your loans over time. Author Dave Ramsey is a proponent of the debt snowball because the strategy helps us modify our behavior. As we begin to pay off our bills, we have quick, tangible wins. Those wins give us the positive reinforcement we need to continue working toward the goal of being debt free.
THE SNOWBALL EFFECT
So, how do you start the snowball and take control of your finances? Just follow the steps below.
FINDING YOUR FREE TIME!
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CHANGE YOUR MINDSET
To successfully pay off debt, you need to change your mindset and behavior. You will never be debt free if you continue spending and charging while trying to pay off all of your loans. This is the most painful step. Habit and behavior changes are never easy. But you will never pay everything off if you keep spending. You must reduce your spending to only necessary and critical expenses. And pay cash…no credit. This will be short-term pain for long-term gain.
Identify your spending and behavior habits that caused you to accrue a large amount of debt. What were the triggers? What are alternative actions you can take instead of spending money when those triggers occur? Get real with yourself and go deep. Determine the root cause of your spending so that you can implement real change.
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GET YOUR PAYMENTS CURRENT
Work to get your payments current and continue making the minimum payments on all your loans and credit cards as you start paying them off. Always keep the payments current by paying the minimum payment due. Late fees will only make the issue worse.
KNOW YOUR NUMBERS
You can’t make a payoff plan if you don’t know your numbers. It’s important to create a budget and know how much income you have coming in every month. You also need to know your total expenses- all of them. Be sure you list your minimum payments required on all your debt as part of your monthly expenses. Keep all of your payments current and continue to pay the minimum payments on all of your loans as you focus on paying down the first bill on your list.
You can’t determine how much extra money you will be able allocate to paying down your loans and credit cards until you have a realistic budget. Use the budget template to help you create your own personal budget.
KNOW WHAT YOU OWE
You need to know exactly what you owe in order to make a payoff plan. List all of your credit cards and loans in order of smallest amount owed to largest amount owed. Ignore interest rates, and just focus on total amount owed. If you owe the same amount on two cards, list the one with the higher interest first.
It’s natural to think you would start off paying the biggest loan first, but remember, we are shooting for quick wins. By quickly paying off your lowest debt first, you are giving yourself a quick win. That first payoff starts the snowball!
create a plan
Once you have listed all of your loans in order of lowest amount owed to highest amount owed, create a plan to pay off the first one. Referencing the budget you created, determine how much extra money you will pay above the minimum payment on the first debt listed. Continue to pay the minimum payments on all the other loans and credit cards. Keep all payments current as you slowly whittle away at what you owe.
GROW YOUR SNOWBALL
After you pay off your first debt, mark it off your list. This is another reminder of the progress you are making towards your financial goals!
Begin paying on your second debt listed after the first one is paid off. Take the money you were paying on the first debt, plus the minimum payment you were paying on the second debt, and pay it all on the second debt. Continue making minimum payments on all the other outstanding debt too.
After your second debt is paid off, take the money you were paying on the first debt, plus the money you were paying on the second debt, plus the minimum payment from the third debt and pay it all on the third debt. Continue this compounding process until everything is paid off. Remember to mark the debt off your list as you pay it off!
KEEP records
Keep a log of every account you pay off. Log information like company, contact information, account number, payoff amount, date paid off, and any confirmation or reference numbers.
YOU’VE GOT THIS!
Debt is constraining and stressful. The process of paying it off can be painful, but it’s better to have short-term pain while paying off the loans, than a lifetime of anxiety caused by financial stress. Use the snowball strategy and find the financial freedom you deserve.
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