So I thought I would share something cool I learned recently with you! It’s a way to get out of debt quickly without changing your current spending habits too much.
So, first things first, do a monthly budget for your home. Make sure you divvy up annual or semi-annual expenses into monthly portions (so if you pay $240 for car insurance every 6 months, make sure you put aside $40 a month on your budget sheet). Make sure you include things like groceries, entertainment, eating out, things like that. It all adds up! Even if you have a habit of getting a soda or snack at work, add it in.
Now, after doing this sheet you’ll probably find out what we did, we spend more than we have each month. Typical americans, and I thought we were so frugal. So, the first orders of business is to free up some of that “wasted” money. Take the vending machine for example. A can of soda in a vending machine is typically $1 or more. You can buy a 12 pack of soda for $5. That’s $7 you just saved by putting a pack of soda in your car instead of getting it at work. You could also adjust your thermostat to save money depending on the season. We’ve almost completely given up eating out and entertainment expenses (like going to the movies). We still go for special occasions. We also decided to turn off our t.v. service. For us, going from crappy basic cable to just internet saved us $40 a month! (I’ll write another post soon about cutting expenses in your home)
After you have started cutting back and you have found some extra money, you can start paying things off, which will, in turn, open up more extra cash! Most financial professionals suggest saving about $1000 for an emergency fund before you start paying off debt. I say you are free to do what you like.
The snowball method for paying off debt is pretty simple. Basically you take that extra money you found (by being frugal), let’s say it’s $75 a month. Apply this to your lowest balance bill and pay it off. Then, once that is paid off, apply the $75 and the minimum payment of the low bill and add it to the next bill. It’s clunky to write, so I’ll give you an example.
You have 5 consumer debt bills (credit cards, car, mortgage, etc) every month. Their minimum payments are as follows:
You need to pay off Bill #1 first, so you add your extra $75 to it every month, making the payment $100. After a few months, Bill #1 is paid off. Now you have $100 extra a month and you apply that to Bill #2, making it’s new payment $150. Then, once Bill #2 is paid off, add the $150 to Bill #3, making it’s monthly payment $225. Now Bill #3 is paid off remarkably fast and you can go on to the car, then the home.
Each successive bill pays off faster than the one before and without costing a penny more than what you paid before you started this process. Your total payments at the beginning were $925 a month, and when you have paid off everything but the house, the payments are still $925. This way you pay off everything faster without having to change your lifestyle.
Not only will this reduce stress a miraculous amount, you will also avoid hefty interest rates. Generally speaking, smaller loans (credit cards, personal loans) have a higher interest and larger loans (cars, homes) have a lower interest. By paying off the smaller sums first and working your way up, you avoid the most interest the fastest way.
Many people are obsessed with paying off their homes because it’s such a large number. But if you nickel and dime a credit card for 30 years, you’ll pay a lot more interest than you do on a home. For example, I have a credit card with a balance of $750. It will take me 3 years to pay it off doing only the minimum payment. In that time I will have paid $750 to the premium and $1200 to interest. Save yourself the $1200 and pay it off in a few months. Then, apply that savings to your other cards, at the end of a year you could have saved yourself $3000-5000 just in interest. It’s not a “cash in hand” savings, but your future cash that you can apply to more important things.
Well, we are going to put this into motion December 1st. I’ll let you guys know how it goes! I’ll even share the graphs with you!
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