As I discussed in my last post, for many people the main thing stopping them from retiring early is debt.
If you did the last action item, you have found areas where you could make some savings. By keeping the money you would have spent on wants, you can start making a snowball.
This is not a new idea; however, it is a very effective method. I have seen people pay an overwhelming amount of credit card debt, using this simple method. It works!
What is it?
This is a debt reduction method used very successfully in reducing credit card bills or revolving credit. Think of a snowball as it rolls down a hill, picking up size and speed as it goes. Imagine doing that with your debts?
The Basic Steps
- First list all your credit card bills in ascending order from small amounts to large. If two outstanding balances are similar, list the one with the highest interest rate first.
- Next note the minimum payments required for each debt.
- Write down what you have been paying (many people pay a little extra on each bill, each month, think of this extra as your snow from which to make your snowball).
- Now deduct the minimum payment on each debt from what you have been paying i.e you were paying $50 and the minimum payment was $40, the difference the $10 is your snow.
- Add up all those little pieces of snow, this is your snowball. For example we have $10 from the first debt and a additional $35 from our other debts.
- We combine this with the money we saved from eliminating a few wants, let say we managed to keep a extra $50 per month. Therefore, our snowball is $95, $45 from the credit card bills and $50 from the excess wants.
Use your Snowball!
- Each month pay the Snowball ($95) plus the minimum payment to the first bill on the list and make only minimum payments on the rest. This will accelerate the payment of that bill (as long as you are not using it to make purchases of course).
- Once the first bill or card is paid off in full, take your snowball plus whatever the minimum payment was i.e. our snowball was $95 with a additional $43 of minimum payment = $138. We now roll the larger snowball down the hill to attack the next bill, again adding the snowball to the minimum payment that we were making previously.
- Repeat, repeat, repeat!
Alternatives
Some advisors suggest picking the highest interest rate first, which will probably mean less interest paid, however if the highest interest rate is also the highest balance, it may be a long time before you see results.
Physiologically we do & feel better when we can actually see the results, just like going on a diet, if someone does not see the weight coming off; it is hard to keep up the discipline.
I have also found that people who use this method become much more focused on paying these debts off and in many cases find extra $$ to build a bigger snowball!
Why should I do it?
You gain a sense of control over your finances and you will pay a lot less in interest payments to the banks. Money, which used well, is the key to start planning for your retirement.
You may never have to see another snowball again!
