Today’s post has to do with Financial Freedom! I bet you like the sound of that, don’t you? Financial freedom is something that we all seek. The ability to be able to say that we don’t owe anyone anything is a dream that we all have.
What if I told you that you could accomplish this with a snowball?? I know that sounds crazy, right? But the truth is that small successes lead to even bigger ones. There are several ways to pay off debt, my favorite being The Debt Snowball. It’s pretty simple how this method works. Think of it in terms of snowball versus an avalanche (which is another method that I will cover at another time.) How does an avalanche often start? With a teeny, tiny snowball.
My husband and I have been wanting to pay off our debt for some time now. We already decided to use The Debt Snowball method to do so. It’s a simplistic way to pay off your debt without losing the momentum. Losing momentum is the biggest cause of debt payoff death, so to speak. When you don’t see progress you tend to stop doing what you’re doing, right?
When you commit to paying off debt this way, you see the small victories which make you want to keep going. Many other methods leave you waiting to see results, and that can be very frustrating. Let me explain how this wonderful method works.
The first thing you need to do is sit down with a pen and paper. I know, I know, pen and paper, so archaic. But trust me, this step is vital. Now that you have your pen and paper, write down all of your debt (anything that majorly affects your credit score falls into this… car payments, credit cards, personal loans, etc.) Now that you’ve written the names down, write down the full balance of what you owe on each one and what the monthly payment is for each.
Okay, now that you have your handy dandy list of all the money you owe from now until what seems like forever, take the list and organize it from smallest full balance to largest full balance. This is the order in which you are going to pay off your debts.
Each month you will pay your regular monthly payments for each debt on the list, however with the smallest balance throw any extra money you can at it until it is paid in full. Whew!!! One debt paid off, it feels wonderful. Now what you’re going to do is continue to pay your regular monthly payment on each remaining debt, except, now the debt that previously held the number one spot on your list is paid off. You’re going to now take the regular monthly payment you would normally put towards paying it towards the second debt on your list and any extra dough you can apply towards it. Once that one is paid off, you now have two debts checked off your list!! How exciting is that?! You will continue to repeat this cycle until all the debts on that list are paid off. Amazing what the little steps can do to help you achieve the bigger picture.
I’m going to break this down a little further below, so as to make it visually easier to understand. (Please know that these are not actual numbers but an example to assist in the learning process.)
I present Susie’s Debt. Susie was not very careful and took on way too many debts when she was in college. She got lucky and received scholarships that paid for room and board, but of course they don’t pay everything else. Susie took on too many credit cards, and she also took out a personal loan, got a car and co-signed a car with her boyfriend, who is now her husband. Now their debts are combined. Below is a list of their debts, the balances and what their monthly payments for each are.
We’re going to take this list and break it down for you as a Debt Snowball payment method.
Step One: Pay the regular monthly payment towards all 11 debts on list. Apply any extra payment possible towards Debt #1 to help in paying it off faster.
Step Two: Debt #1 is now paid off. It’s regular monthly payment equals $30.00. Pay regular monthly payment for Debts #3-11. On Debt #2 pay it’s regular monthly payment of $25.00, but add Debt #1’s regular monthly payment towards it. (Equalling new monthly payment for Debt #2 of $55.00) Add any extra payment towards it to pay it off faster.
Step Three: Debts #1 and #2 are now paid off. Their regular combined monthly payment = $55.00. Pay regular monthly payment for Debts #4-11. On Debt #3 pay it’s regular monthly payment of $37.00, but add Debt #1 and Debt #2’s regular monthly payment towards it. (Equalling new monthly payment for Debt #3 of $92.00) Add any extra payment towards it to pay it off faster.
Step Four: Debts #1-3 are now paid off. Their regular combined monthly payment = $92.00. Pay regular monthly payment for Debts #5-11. On Debt #4 pay it’s regular monthly payment of $53.00, but add Debt #1-3’s regular monthly payment towards it. (Equalling new monthly payment for Debt #4 of $145.00) Add any extra payment towards it to pay it off faster.
Step Five: Debts #1-4 are now paid off. Their regular combined monthly payment = $145.00. Pay regular monthly payment for Debts #6-11. On Debt #5 pay it’s regular monthly payment of $92.00, but add Debt #1-4’s regular monthly payment towards it. (Equalling new monthly payment for Debt #2 of $237.00) Add any extra payment towards it to pay it off faster.
I’m sure by this point you get the gist of how the payoff method works. You just simply keep repeating the steps each month until eventually every debt on the list is paid off. You can see the progress you make on this one and it definitely helps keep up the momentum.
I hope you enjoyed this post and found it to be highly informational. Any thoughts, questions or concerns, please leave them in the comments. I look forward to hearing from you!
Thanks for stopping by!