In my last post I eluded to the next step being about money going toward debt. However, I should just say that before you start this, you should have $1000 in savings just in case of an emergency. That is STEP 1. Anything else that might have been in savings will go toward this debt snowball in STEP 2. If you have an income that fluctuates on commissions like my good friend who owns a tree removal service company, you’ll want to have a bit more in savings for slower periods in your work. There are some weeks where he’ll have no work and other weeks where he’ll be really busy. Careers like his or those on commissions, etc. are examples of when to have a slightly higher savings to start.
On to STEP 2 – The Debt Snowball.
This was where getting on top of our finances got exciting. You take whatever money you have left after bills and cash withdrawn (as stated in my previous post), and you put all of the extra toward your first debt. Your debts need to be listed LOWEST balance to HIGHEST balance. Do NOT worry about interest rates unless two balances are almost the same. The point of this is that you have more success seeing success. Those smaller debts can be kicked out fairly quickly and give you a huge mental boost to keep going. If you start with your largest debt first (ours was $130k), then you would lose hope and give up just a few months in. Here is more info on that. Here is what we did. We took any extra out of savings over the $1k and any extra from our paycheck and we threw it at our first debt which was a credit card. We knocked that card out in one month. The minimum payment on that card now rolled to the next debt along with any extra we had been throwing on it. The next debt was another credit card. After all the money went to that, the next debt was a car. By then we had an extra $500+ per month to throw on the car payment, that payment was knocked out in less than 6 months. You get the point of where I’m going? Here are some links to some great snowball calculators…
REMEMBER, start with lowest balance owed first.
Play with one of those and see what you can do with this method! Your debt can go more quickly than you think!