Credit card and loan debt can be a burden that hangs over you and your family for years. Many people do not know how to properly address the issue and remain in debt for most of their lives. It is important to formulate a plan of attack against these bills and systematically eliminate them in order to achieve a debt free lifestyle. The snowball effect, made popular by the finance guru Dave Ramsey, is an effective strategy for saving money and reducing your debt.
The most crucial, yet basic step to the snowball effect is to always make your minimum payments, and make them on time. Late fees are completely unnecessary and can quickly grow out of control. Late payments can also lead to increased interest rates. One late payment on a single credit card can lead to increased rates on all your other cards. Plan your monthly budget accordingly to make sure your bills are paid, even if it means cutting down on entertainment or discretionary expenses. Late payments are never an option.
Next, write down exactly how much you owe on all your debts. This includes credit cards, car loans, and student loans. Organize them by dollar amount, beginning with your smallest debt. Disregard the amount of your monthly payments… we’re attacking the debt itself.
Each month you should make extra payments towards your smallest debt . Try to at least double your monthly payment for each billing cycle. Set aside as much money as possible throughout the month to make this payment larger. Skip a fast food meal or wait to buy that latest tech toy. Each extra dollar you put toward increased payments can lead to hundreds of dollars you won’t have to pay in interest down the road.
As you make extra payments on your smallest debt, you will find that it is paid off rather quickly. Make note of how much your minimum payment was each month. Instead of paying less on bills every month, take what you were paying on the old bill that is now paid off, and put it towards your second smallest debt . It was already in your budget, so it shouldn’t make a difference financially.
Now you will begin to see where the term snowballing comes from. As each smallest debt is paid off, those payments that you would normally make are put towards your next bill. While maintaining the same budget, your bills will be paid off with increasing speed. This is much better than paying a little extra on random bills from time to time. Again, use any extra income to make extra payments on your smallest bill.
One additional strategy many use is to build up $500 to $1,000 in your savings account. This will be a little nest egg you can tap into in emergencies. You should avoid charging more to your credit cards at all costs. First turn to extra cash, then to your savings, and only to credit cards if absolutely necessary. Build up this nest egg first to avoid increasing your credit card debt. It’s better to decrease what you’ve saved than to increase what you owe.
Snowballing your debt is definitely not for the faint of heart, but can lead to a strong financial future. Remember that it takes discipline, planning, and sacrifice. You may not like missing out on that frivolous purchase, but when you are debt free, you’ll be happy you did. Following these steps can be one of the best decisions you can make financially, and can save you thousands of dollars in interest and fees.