Paying off debt can be frustrating and confusing, especially when you don’t have a plan in place. However, we want to encourage you that there is a way out.
Taking that first step can be overwhelming. It can feel like learning to ride a bike - the first time you hop on without training wheels is usually the most daunting!
Getting out of debt takes focus and perseverance. The good news? Anyone can do it. At INB, we work with clients to get out of debt following Dave Ramsey’s Debt Snowball strategy, the 2nd step of Davey Ramsey’s 7 Baby Steps to financial freedom.
Here’s how the Debt Snowball works…
Stop adding to your debt.
It may sound simple, but the first thing you need to do is stop taking on more debt. This may mean adjusting your lifestyle so that you’re not spending more than you make, or perhaps you need to consider cutting up that store credit card. You can look at where your money is going by completing our Monthly Cash Flow document.
Then, as Dave Ramsey suggests, save $1,000 as fast as you can.
You’re likely asking “Why would anyone put money in a savings account instead of using it to pay off debt?”
This $1,000 emergency fund is your safety net. Life happens – your fridge goes out; your car needs a new transmission. With $1,000 in an emergency fund, you won’t have to go deeper into debt when the inevitable comes your way.
Save now, so you can stop adding to your debt. This step adjusts your mindset to be in control of your money.
Create a plan.
Identify all of your debts, and write down how much is owed and to whom, and what the interest rate is. Then, write your list starting with the smallest debt balance first in order down to the highest balance.
Your debt snowball should include all non-mortgage debt, such as:
- Payday loans
- Student loans
- Medical bills
- Car notes
- Credit card balances
- Home equity loans
- Personal loans
You now have your debt snowball repayment plan!
Make minimum payments on all debts except the smallest.
The smallest debt is what you’re focusing on first – and after your “Four Walls” or your necessary expenses have been covered in your budget, you’re throwing all of your excess income at paying down this debt. Once that loan or credit card is paid off, you’re on to the next one…
Roll your debt payments to the next debt.
Each time you pay off a debt, celebrate – and then move on to the next one on your list.
Apply all of the cash you were paying on the first debt to the next smallest balance owed. Continue to make minimum payments on the rest, and repeat this method as you plow through your debt.
The more you pay off, the more money you have to throw at the remaining debt. You’re gaining momentum like a snowball rolling down a hill!
Please email Amy Barnes to schedule an appointment or call her at 217-679-1676.
Want to go even faster?
To reach your goals even faster, look at ways to free up extra money in your budget or search for ways to make extra income.
You may need to make some changes to your lifestyle – which often includes sacrifice. But in the end, by giving up trivial things here and there – a latte or a fast-food lunch run or a new shirt – you will be gaining the freedom of ultimately being able to tell your money where to go and to save for the future, instead of handing it all over to debt payments.
Looking for ideas to reduce debt or make additional income to pay off debt? Check out these 28 ideas from Dave Ramsey.
If you are in debt and looking for a way out, contact me today.