Okay, considering the current state of affairs with our economy and the world, I don’t want to drag my feet in getting through the Dave Ramsey steps to financial freedom. We’ve already covered Step 1: Getting an Emergency Fund, and hopefully you’ve had a chance to work on that and get that done. So let’s move on to the next step… GETTING OUT OF DEBT! (Wahoo!!)
Step 2: Paying Off All Debt Using The Debt Snowball
Here’s how it works. Start off by listing every single debt you have (excluding your house) in order of smallest balance to largest balance. Cars, credit cards, medical bills, personal loans, etc. List them all. Do not worry about which ones have higher or lower interest rates unless there are two balances that are the same (in the which case, list the one with the higher interest rate first). Otherwise, we’re strictly looking at balance amounts.
Here is a form you can use to help organize your process:
The Debt Snowball Plan Form
Why lowest to highest balance? (I know you math wizards out there are thinking it would make more sense to go by the interest rate instead of the balance.) Well, because as Dave Ramsey points out, getting out of debt is not always about numbers. It’s about attitude and motivation as well. As you start knocking out your smaller debts, you will get more pumped and motivated to continue in your efforts. By getting some quick returns on your efforts, you are MUCH more likely to stay focused on reaching the end goals. This is as much a psychological battle as it is a financial battle. So don’t doubt the system. Know that it is a PROVEN METHOD and just go with it!
Okay, once you’ve got all your debts listed from smallest to largest, list your minimum monthly payments (the amount you’re required to pay each month) for each one.
And now the fun begins.
Okay, now you know exactly what you owe and exactly what you have to pay each month. And every month you are going to pay the bare minimum on all of your debts except for the first one on your list. The first debt on your list you are going to ATTACK! You are declaring WAR!
Find every spare penny you can in your home. Start selling things on craigslist or ebay. Have a yard sale. Reduce your monthly bills. Cut the cable. Get rid of your cell phones (or land phone). Get a second job. FIND ANY WAY YOU CAN (ethically and legally of course!) to get extra money in your hands and put it ALL to that first debt. ATTACK! FIGHT! THIS IS WAR!
And guess what? You will be AMAZED at how quickly that debt will be vanquished! SUCCESS! You’ve done it!
Now, with that same intensity, attack the second debt on your list! And the bonus? Now you have all that extra money from the first debt that can now be applied to your second debt! So if you were paying $150/month to your first debt bill and only $30 to your second debt (because that was the minimum payment), you can now add $150 to your $30 to get a new monthly payment of $180/month for your second debt. Do you see how the snowball has already started? And before you know it, that second debt is history as well!
And when the second debt is paid off, you add that $180/month to your third debt on the list. And it just gets going faster and faster with every debt that is paid off!
It will honestly amaze you how quickly you can actually pay your debt off if you focus and dedicate yourself to it. Dave estimates that it takes the average person who uses this method about 18 months to get completely out of debt (besides the house). That’s amazing!!! FINANCIAL FREEDOM IS IN YOUR REACH!! YOU CAN DO IT!!!! So go get to it!!! 😀
Good Luck, Best Wishes and Happy Prepping!! 😀