Things You'll Need:
- Consumer Debt.
- The Desire to Get Out of Debt.
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Step 1
Your Budget Must be Accurate!The Budget - You have got to be honest with yourself. It is crucial to have an accurate budget that shows your current monthly expenditures and liabilities. Your budget should include your regular monthly bills (electric, water, etc.), your debts (car payment, credit cards, etc.), and other monthly expenses (gas, groceries, etc.).
If you are struggling with the creation of your budget, take a month to write down everything you spend your money on. Use a notebook that isn't used for anything else. Treat your notebook like a checkbook ledger. If you buy a coffee, write it down. If you dart into the convenience store for a bottle of water, write it down. Do this for one month. You may be surprised, you may not, but you will have an accurate account of the money you spend every month and can use this data to create your first budget. -
Step 2
The Plan - Take your budget and highlight everything that is debt. Any money you owe anyone, from your home mortgage to your smallest credit card. Write them all down, beginning with the debt you owe the least amount on. Write the name of the creditor, the balance of the debt, and the monthly minimum payment.
Example:
Credit Card 1.....$300.00........$15.00
Credit Card 2.....$800.00........$35.00
Car Loan..........$6,000.00......$320.00
Student Loan......$12,000.00.....$325.00
Whether you owe money to three creditors or twenty, list them all in this manner. Most people that are turning to bankruptcy, credit counseling, or debt consolidation have the means to take action and pay the debt off themselves. It can seem overwhelming if you are in what you perceive to be over your head and that is the purpose of this plan. -
Step 3
Finding the Money - You are going to find the extra money you seek in your budget. Look at your budget carefully and determine where you are wasting money. Is it at the grocery store? Do you eat lunches out everyday? If you cannot find any extra money, it is time to make sacrifices. Sacrifices at the grocery store are probably the easiest to find.
Your goal is to find an extra amount of money that you can put toward your debt payments. You should attempt to find four-times the amount of your lowest minimum monthly payment. In the example above, the lowest monthly payment is $35, so we are looking for 4 X 15 = $60. -
Step 4
Taking the First Step - When you pay your creditors, pay them all the minimum payment except the one you owe the least amount on. In our example, this is Credit Card 1, on this payment we are going to add the $60 we found in our budget too the minimum payment, making a payment of $75.
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Step 5
The Snowball - Here is the beauty of this process. It will take you approximately four payments to pay off Credit Card 1, making $75 payments. When it is paid off, you immediately apply that $75 to your next highest debt, Credit Card 2. That is, $75 plus the $35 minimum payment, totaling $95.
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Step 6
Consistency and Persistence - This is not a get-out-of-debt quick scheme. This plan takes tenacity, will-power and consistency to work. It will take time to eliminate any significant amount of debt. After you have listed your debts as instructed above and determined how much extra you can apply to the first creditor, you will be able to calculate exactly how many months it will take to be debt-free. Do not be surprised if it is going to take 18 months or even three years to get out of debt. As Dave Ramsey says, "You didn't get where you are overnight, so you can't get out of it overnight either". {Paraphrase}
Comments
mobwriter said
on 12/28/2009 What a useful and well-written article! I highly recommend it.
andrew215 said
on 12/23/2009 Great stuff, i have done some of this in the past, and it works guys! Thanks again!
dfager said
on 12/20/2009 Makes sense to get out of debt this way, but so hard to do!
woodzoo09 said
on 12/19/2009 Great article with easy to follow steps! 5* and Rec'd
deaconhayes said
on 12/13/2009 I am impressed, you were very thorough and I enjoyed your examples. I recently posted a similar article and just stumbled across yours. My wife and I are near the end of our Debt Snowball and it feels great!