Snowball

       This is the time to stay focused, trust the system, and celebrate the victories. There is a pot of gold at the end of this rainbow. I remember ours was around $1,100 per month. This $1,100 was now ours to save, invest, and give every month. You want to give yourself the biggest pay raise you have ever received? Pay off your consumer debts. It is somewhat of an all or nothing system because you don’t get the raise until the entire step is completed. So, let’s get excited about what we’re going to talk about this time. I want you to write down all the debt payments that you have each month, this includes college loans, credit cards, car payments, and anything that has a balance to be paid. Now, simply add up all the monthly payment amounts, write that total number down BIG somewhere. That number is your raise! That is all take home money that you get to spend, or save.. not to pay back to some finance company.

          This process is going to take time and we must be diligent and stay the course. We were able to pay off $25,000 of debt in 2 years. There are a couple ways to approach the debt snowball method, one involves organizing debts by highest interest, and the other by smallest balance. Because there are two different methods, there are also different benefits to each one. I would recommend that for most of us, the smallest balance method is the one to use. The reason we may not want to use the highest interest method is that the debt with the highest interest may also be our largest balance. This first debt payoff could take a very long time and the process may feel discouraging, and we may lose focus.

Methods:

Highest Interest – This method financially is the best, because you are eliminating each debt by the amount of interest. Because you are paying off the highest interest first, you will pay it off faster thus paying less interest.

Smallest Balance – This works more on the reward system, because you will experience victory quicker this way, and this should generate momentum to keep knocking them out. (recommended)

Process:

1. The foundation, this is us being current on all our bills, and the $1,000 “What-if” stash of cash. At this point, we should all have these in place to provide support while we attack our debts.

2. Write a list of each debt, interest, (minimum) monthly payment and balance. As we talked about earlier, the “raise” in this example is $408/month.
                             
3. Organize the debts in the snowball format, there are several websites available to generate this payoff chart. I used - http://www.whatsthecost.com/snowball.aspx We are going to use $50 dollars of money we have extra from our budget to service our debts. So this $50 will get added to the first debt’s minimum monthly payment. That’s why you will notice the credit card payment at $89, instead of $39.


4. Build up that payment, each time a debt is paid off that debts payment is applied to the next debt. So in the payoff chart above, we notice the “car loan” even at its monthly minimum payment is actually paid off first, so that payment is then applied to the first debt (credit card). Then once the “credit card” is paid off, that entire amount goes to finish off the “student debt”.

This process will allow you to pay off all your debts at a fraction of the interest, and will greatly reduce the time in which it would take pay them off. It only took 12 months and cost $221 in interest to pay off all $5,220 of debt, that’s amazing!

Now, you’re wondering how bad could it be to pay the minimum payment? Well, if you paid the minimum payment on the credit card alone as your plan to pay it off. Assuming you didn’t add any more charges it would take you 47 months, and cost you $497 in interest!!! That’s just the credit card…

You have what it takes to do this, attack the debts, get control of your money and change your future!

Without A Paddle

          Okay, so hopefully at this point, we are building some momentum to tackle our finances. We are in the boat rowing our way to financial freedom. We will experience obstacles that we will need to deal with and get around. So to make sure that we can steer and keep the boat moving, we need to make sure we have a paddle. I personally feel that this is the most important part of this process because it’s the tool that enables us to stay the course. While we attempt to pay off debt, refine our budget and continue to improve our finances, we will still have the same problems as we did. The water heater will stop working, you’re going to get a flat tire, or need some unexpected medical visit. The issues that we will face during this journey may seem small and manageable but we need to keep our guard up. As we face these problems we may find ourselves using more credit to pay for them. This will make our situation worse, and could potentially derail us from the plan.
          So, what is our “paddle”? Our paddle is our “What-if” stash of cash. This stash is going to be $1,000 and will need to be maintained at $1,000 as we proceed through the following steps. Notice that I referred it as the stash of cash, not the credit card balance, or the allowable loan at the bank for an emergency. This “paddle” needs to be made of cash, and I recommend that we keep it accessible but safe. When I say “safe”, that simply means that you can get to it when you need it, but not when you want it… the key word here is NEED. Don’t remove money from your stash because you want a new pair of shoes, or to buy that purse because it was “on sale”. Prepare yourself for the issues before they arrive, because they will come and it may even seem like more often than normal. Make sure that each time you have to use money from this account, that your first priority is to refill it to the original $1,000.
          There is a great book called The Total Money Makeover by Dave Ramsey, it’s a must-read for financial freedom. In this book, Dave uses “baby steps” to create his plan. I read this book and applied the methods, and attribute much of my financial improvement to this book. This $1,000 cushion is the first step Dave gives us, and for good reason. The money works as a safety net to catch us when we fall, so we can easily get back up and keep going.

Where am I going to get $1,000?

          Okay, we get it.. we need to save $1,000 for a rainy day. This isn’t as difficult as it sounds, but most of us have already talked ourselves out of trying. “I barely can pay the bills I have”, “I’m already using credit cards to pay my expenses”, telling yourself “I can’t do this”. I’m here to tell you that it is possible, but you have to be willing to get creative and make some sacrifices. This is a simple task so don’t make it some big life-changing goal, get $1,000 into a separate account and you’re done. Take some time a review your budget and evaluate if there is anything you can cancel, or cut back on. Clean out the garage and sell some stuff, work a part-time job, or any other means of generating more income. There was a financial survey that I read about, and the #1 thing people did to save the most money was to stop going out to eat. If you just reduced going out by two times in a month could be $100 that could go towards this stash of cash. This is a required step that we must do prior to moving on to the next step.
          This step has more to it than its intended purpose. For some people saving a thousand dollars is going to be very challenging, but you can do this. This step offers training in saving, provides money for setbacks and will create a true sense of success. The initial victory of this small battle will inspire you to keep pushing forward and show you that you have what it takes to win the war. The transformation can begin to take place once we realize that money problems are less related to our money, and more to our behavior. 

Let's Talk About The "B" Word

         The word “Budget” is not a bad word; instead, it should be used in everyone’s vocabulary. It’s interesting to consider though, that we as adults will exclude this word from our vocabulary the same way we teach our children to exclude the first word that popped into your head. Creating a budget is crucial to improving your finances. A budget will allow you to stop missing payments, damaging credit, and paying late or overdraft fees. Simply by creating a budget, you have now started to delegate where your money goes. Every dollar has a place, including savings, bills, and spending money. Having a budget can also help that person that claims not to have any money find some extra cash each month. Maintaining a budget is crucial to improving your finances. I process things well when someone breaks it down for me. So let’s take it one thing at a time.

1. Know Your Net (Income)

We need to know how much we are working with before assigning it a destination. Just like the other parts of this process we need to remember to be honest with ourselves. When we write down how much income we are taking in, this number must come from a paycheck stub or checking account statement that includes all sources of income. The important number to use is the net income, not gross. This is why a checking statement will work because it will provide us with the actual deposited amount that you get to spend. The gross income figure is our total pay before any and all deductions (taxes, 401k, and insurance). We are looking for a monthly amount here, so whether you are paid weekly, bi-weekly, or hourly try to figure a total amount for one month.

2. Cover the constants

Now that we know how much income we are working with, we can start looking at where it needs to go. We need to cover the constants, or the bills and expenses we know are the same or nearly the same each month. The constants include expenses such as a rent payment, car payment and insurance. These are easy to track and pay because they do not fluctuate month to month. There is a way to help make bills more constant that do have minor monthly variance in them (gas $45.23, $56.43, $41.54). When they are similar in amount as shown, we can simply create an average. This can be done for a few months, or over the year, if we were doing these 3 months just add them together and divide by 3. Write these all down below the total income from step one.

3. The unknown$

These are the expenses that no one talks about in terms of actual amount. The categories that include groceries, gas for our vehicles, and that little “fun” money. Can you tell me what you spend per month on groceries or your morning coffee?? This is where you will need to get that checking account statement again, and maybe those credit card statements we don’t look at. This will take some work because you need to summarize all those line items. Then create categories for the money spent on those things. Create expense categories like, “fun spending”, Vehicle gas”, “clothes”, and “date night”. We will again want to get averages of these amounts, so gather a few of each statement. Be consistent with the items and amounts that you add to each category. This should now allow you to generate a consistent monthly amount that you can deduct from that total income each month. Write these all down under the expenses from step two.

4. Excellent Budget

Now that you have all your known income and expenses listed we need to combine this information onto one sheet. I personally use Microsoft Excel to manage my budget, but it works the same to write it down as well. At the top you will write the total monthly net income, below that you will list the constant expenses, then the unknowns... that you now know. Once this is completed simply subtract all expenses from the income at the top of your form. This will generate only two outcomes. The final figure will be negative, or positive. In the event of a negative number, don’t panic, you will need to start cutting expenses or working another job etc. The thing to remember is that now you know, and can begin to improve your situation. If your number is positive, then you get to decide where you want that money to go. This can be a savings account, date night, or vacation fund. Now if you have debt, however; I would recommend putting it towards paying that off.

The budget is a dynamic document that changes, and grows, and needs to be revisited on a regular basis. So make sure you are intentional about reviewing this regularly and more often if this is a new concept to you. This tool just gave you control over your money, now it can only go where you decide it does. Once you start telling your money what to do, you can regain financial control and begin to enjoy using the “B” word!

Some of these expenses can be removed permanently as we pay off those debts (car loan, credit card, student loans) and we’re going to use a snowball to do it!