Are you interested in paying off all of your debt really quickly? Last week I posted about the budget sheet and living forecast sheet we used to help us pay off over $100,000 worth of student loans in under two years.
Using the Money Life Wax budget sheet, we used Dave Ramsey’s infamous debt snowball plan with a few tweaks.
What is the debt snowball?
The concept is to stop spraying your money and never attacking the principal amounts, therefore never paying down your debt. An analogy I always use when explaining the concept is imagine you have 6 fires to put out at one time with one hose. Is it better to keep each fire small but never put it out while spraying them all? Or would you rather drown out one fire at a time, moving on from one to the next. The best answer is the latter.
How do you start?
Start with a budget and goals. In my budget post, I detail how just weeding out wasted spending will help the average person discover between $200-$800 in their budget. You need to have a budget and the reasoning behind this is that every dollar every month is accounted for. If money just sits in your checking account, or even if you have globs of money sitting in a savings account earning only .35%, you are losing money if you have debt.
3 Simple Steps:
Step 1: Line your debt up from least to greatest, including minimum payments and interest rates. For student loans, break them down individually, even though you might make one lump sum payment.
Step 2: Decide/figure out how much extra you are contributing and where to attack. There is strategy in what you attack. For example, where we have changed things up, somewhat different of what Dave Ramsey might say, we attacked loans that would inject more cash flow into our budget. For example my car freed up $185 where as one of Lauren’s loans, even though the principal balance was lower than the car, only freed up about $36. We went with the bigger amount because of the freed up cash flow, but we also used a debt acceleration program that I keep hinting at and will release in the upcoming weeks.
Step 3: Pay the extra as you get it. Online payments make it easy to allocate the extra money to your debt. With most people getting paid twice a month, we figured out we could take a certain amount each time we got paid and put it towards the focus area.
Lets use a sample couple, who has an extra $600 a month to contribute to their snowball.
In 40 months, starting with just an extra $600 someone could wipe out their consumer, auto and student loan debt. Lets add a twist. Let’s say this fictional couple rolls that freed up $1700 a month into a $200,000 mortgage: