So let's recap where we've been in the past couple weeks. First, we figured out where we were financially and created a budget to get us moving in the right direction. Then, with the help of our newly created budget, we got current on all our past due bills. Finally, we've sold a few things and socked away $1000 for our temporary emergency fund. That's quite the list of accomplishments! Do you realize how many people never even get to this place? Now that you're here, it's no time to kick back. Instead, it's time to kick up...the intensity, that is. It's time to go after that debt and get it paid off. But before we do, I want you to imagine for a moment what you would do if you were debt free. Maybe you would save up for that vacation you've always wanted to go on and pay for it WITH CASH. Maybe you'd finally be able to save enough for a down payment on a house. Or maybe there's a ministry that you've always wanted to be able to give to. Whatever it is...get your imagination going and let it fuel your passion, desire and intensity to get yourself out of debt...because this milestone is typically one of the hardest to reach and usually one of the longest milestones to get to.
Here's how to go about tackling the mountain in front of you.
1. Quit borrowing more money! Cut up your credit cards and close any open credit lines to help remove any temptation. Remember, you have your $1000 emergency fund for those unexpected events now!
2. List your debts in order by balance amount, smallest balance to largest balance. Include creditor name, payoff amount, and minimum payment amount.
3. Using your budget, determine how much money you need for your regular monthly expenses, and how much is left over.
4. Using the amount left over, make the minimum payment on all your debts EXCEPT the first on on the list. Take whatever is left after paying the minimum amount on all the others and put it ALL towards the first debt on the list, the one with the smallest balance. Continue doing this each month until the first balance is completely paid off. Don't forget to call the creditor and send a letter to officially close the account - some people mistakenly think that by cutting up their credit card, the account is closed!
5. Cross that debt off your list, take a deep breath and then jump right back in. Continue paying the minimum payment on all but the NEW smallest debt. On this one, you want to pay the minimum (which you've been paying all along), PLUS the full amount you were paying on the debt you just paid off. Continue doing this each month until the balance is completely paid off. Close the account and move on...
6. Continue this process until all your debt is completely paid off.
This technique is called the "debt snowball", simply because the concept allows you to start small and pick up momentum as you go along, much like a snowball picks up snow as it rolls down hill, getting bigger and bigger and bigger. The longer you stick with it, the faster your debts will begin to disappear!
The steps are simple, and actually fairly easy as well. However, the discipline and endurance to finish the job are far from easy. It will take intensity, desire, and commitment to make this happen and to not lose heart and get discouraged! Setting some goals for yourself and celebrating milestones as you reach them is one way to keep yourself motivated. Another way is to find an accountability partner. Find someone you know that will do this with you. Its kind of like getting a workout partner...someone who will go to the gym with you, keep you accountable about what you are eating, celebrate with you when you lose weight...same concept. Having accountability will help you keep the momentum going.
Getting out of debt is an exciting, liberating accomplishment! Savor the victory, but don't get too comfortable, because Friday we're going to continue moving down the Road to Financial Freedom with Part 6 - Finishing Your Emergency Fund!
