Prioritize Your Debt
February 1st, 2009. Published under UrbanSpeaker. No Comments.
Thanks to reader Brittany for the idea for this article.
If you are using a budget, the goal is to get some positive cash flow. But then what? What should you do with the bit of money that you have managed to free up?
Luckily, there is no shortage of places to put extra cash these days. You can build an emergency fund, save for something special or invest it. However, nothing is more of a drag on your financial health then debt. Also, the way many loans are built, especially credit cards, the interest is enough that if you pay the minimums forever, you’d never be free of them.
There are many ways to prioritize and pay off debt; however, in my opinion Dave Ramsey has one of the best methods. He is a financial coach who preaches on what he calls “The Debt Snowball”. Here’s how it works:
1\\ Order the Payments. List your debts from smallest to largest.
2\\ Pay the minimum on all your debts. Meanwhile, for the smallest debt, take all your extra money, everything you can spare, and throw that at the debt.
3\\ Once the smallest is paid off, roll the minimum monthly payment into the next smallest payment. Now you are paying the minimum on all the debts except the second smallest, where you are paying the minimum, plus the minimum from the previous smallest. Now throw money at the debt.
4\\ Continue rolling the minimums into the next highest debt and watch these payments grow, like a snowball as it rolls down a hill. By the time you get to the largest debt, your “snowball” will be large and you’ll be making huge payments. You’ll be using all the minimums from the previous debts, plus the extra money you are throwing at it.
No only is this an effective way to get debt free, it allows you to build confidence in yourself as you pay off debt after debt.
As well, once all the debt is paid off, you can continue using that huge snowball you’ve built to pile money into other areas, such as emergency funds and savings accounts. Since you’re not used to spending that money, you won’t miss it, which makes it easier to use it in productive ways.
Photo by: Redvers
