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!