Becoming debt free is something that feels like nothing else in the world. If you are trying to get caught up, make sure you have reviewed the other steps recommended to help you work yourself out of debt.
Now comes the fun part – actually paying down debts! Of course, if you are already debt free and are working on building your savings, just apply these same principles to your savings account. Instead of paying the debtor, pay yourself!
DEBT SNOWBALL
Now comes the “fun” part – watching your debts slowly disappear! Make sure that you have some of your forms handy, as you will need them for this step — Budget & Debt Snowball.
Let’s make sure you have the forms completed correctly. Your Debt Snowball should show the debts you owe, listed from the lowest balances to the highest. You should also have your budget, where you list each debtor and the amount of the minimum monthly payment you need to make. Got that? Good!
Now, take a look at your budget. Do you have any ‘extra’ money you have freed up towards paying down your debts? If you do, then look at your Debt Snowball form to find out who you owe the least amount of money to. Then, go into your budget and increase the monthly payment to them by the amount of the “extra” money showing in your budget. Here’s an example:
Citibank – owe $500 – monthly payment of $10
Visa — owe $885 — monthly payment of $15
Auto Loan — owe $12,500 — monthly payment of $425
Let’s say that you show “extra” money in your budget in the amount of $25. Your budget will then look like this:
Citibank – owe $500 – monthly payment of $35
Visa — owe $885 — monthly payment of $15
Auto Loan — owe $12,500 — monthly payment of $425
This means you will pay $35 each and every month to Citibank until it is paid off. You will not pay anything above the required minimum payment to any other debtors. Then, when Citibank is paid off, you will roll that payment into Visa – which means you will pay the $50 per month. You will continue to do this as you eliminate each debt, increasing your monthly payment – just like a snowball!
WAYS TO ELIMINATE DEBT
I previously shared some ways to help you eliminate your debt (outside of your monthly payments). As a reminder, here are some ideas:
- Sell items on Craiglist, Ebay or other methods. If you have extra things lying around the house, you may wish to sell them and raise some money and then turn around and make a nice big payment on that smallest debt.
-
Get another job. If you can swing it, pick up a part time job and apply all of your earnings towards your debt.
-
Reduce savings and pay down debts. If you happen to currently have MORE than $1,000 in the bank, but still have debts, you should really take any amounts above $1,000 and pay down your debts BEFORE you are saving. The reason is why are you saving money for yourself and paying more in interest to someone else than you are making yourself?
So, what about that nice big tax return that is coming your way in a few weeks? Well, if you really want to jump start your debt elimination, you would be wise to deposit $1,000 into the bank (if you do not yet have your emergency fund) and then turn around and use the remainder and pay down your debts.
Now that you have your budget and are starting to actually pay down your debts, you are on the right path!
(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)