It’s time to start getting yourself out of debt. You should at this point have discovered where your money had been going and made a new budget where you are living within your means.
You should have also found 10% of your income for paying down your debt through the saving ideas on this site. To make the explanation as simple as possible, I will give an example situation.
What is Snowball Debt Reduction?
In simplest terms, the "snowball method" means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue "snowballing" until all accounts are paid off.
Snowball Debt Reduction: Example Case Study
This example is purely figurative to show the concept of how the guerrilla debt reduction plan works. After consolidating all his debt, Dave has 3 credit cards left with balances of $1,000, $2,000 and $3,000, a car payment ($250), and a house payment ($750). His income comes to $2,500 a month after taxes. There is the guerrilla way to pay off all these debts within 10 years:
He should make the minimum payment on each of his debts and then add the $250 (10% of $2,500 take home pay) to the highest interest credit card payment.
For the first 4 months he’ll be paying $270 toward credit card A, $40 toward credit card B, $60 toward credit card C, $250 toward the car payment and $750 to the house payment at which point credit card A will be paid off.
Once this has been accomplished, the payment that was being made toward credit card A will be applied to credit card B. Therefore for the next 7 months he will be paying $310 ($270 + $40) toward credit card B, $60 toward credit card C, $250 toward the car payment and $750 to the house payment at which point credit card B will be paid off.
Debt Amount % Interest Minimum Payment
Credit Card A $1,000 16% $20
Credit Card B $2,000 14% $40
Credit Card C $2,500 12% $60
Car Loan $10,000 6% $250
House Loan $100,000 8% $740
Snowball Method Goals: Paying Off All Debts
This process should be continued until all the debt is paid off, and even assuming there are no pay increases, and therefore a larger 10% of income going toward eliminating the debt. All debt (including the house mortgage) will be paid off in well under 10 years.
Although I have used 10% of take home pay (and a minimum amount you should be shooting for), any percentage will do. If the percentage is lowered, it will take longer to get rid of the debt while if the amount is increased, the debt will be paid off that much sooner.
Once all the debt is paid off, you can continue to make the same payments. Instead of paying it to others to pay off your debt, pay it to yourself in the form of retirement savings.
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