Million Tips » Personal Finance

Pay Off Your Debts Using the Snowball Method

Jeremy Reis — Thu, 11 Feb 2010 03:04:48 +0000

Dave Ramsey is the best known proponent of a debt payoff method called the “snowball method.” The snowball method is a way for you to pay off all of your debts: credit cards, car loans, student loans, house mortgage, and other debts.

The first step to creating a debt snowball is to list all of your debts with the balance owed and the minimum payment. Next, determine the total amount of money you can pay towards your debt each month. This number must be more than the total of your minimum payments, otherwise, you will never get out of debt!

Re-order your debts with the lowest balance first. If you have two debts with similar balances, list the higher interest rate first. Now, pay the minimum on all of your debts except for the first debt – apply any extra cash you have to that balance to pay it down first. After you have paid off the first debt, apply everything you were paying on that debt + the minimum payment on the next debt and pay it off (thus the “snowball” effect on your payments).

Why do we list the debts with the lowest first and not the highest interest rate first? Psychologically, it’s better for you to have some “wins” on your way to becoming debt free. As you pay off each debt, it is a win for you and you will begin to see progress.

Create a Budget

Jeremy Reis — Sat, 12 Dec 2009 15:00:55 +0000

Creating a realistic budget is one of the most difficult things to do when you are working on getting your financial life in order. It is also one of the most important things! A budget will help you understand where your money is going and help control your spending so you can pay all of your bills on time, pay down debt, and become financially secure. Learnthat.com has a free tutorial covering how to create a family budget.

Sample Budget (Excel Format)

Use Personal Finance Software

Jeremy Reis — Sat, 12 Dec 2009 02:35:05 +0000

Use personal finance software, such as Quicken, to manage your budget and get your spending under control. The software can tie into your bank account and automatically categorize many of your common expenses to help you create a budget and stay within budget each month.

Create an Emergency Fund

Jeremy Reis — Mon, 07 Dec 2009 16:38:27 +0000

Create a $1,000 emergency fund to help get your financial life in order.

We all have emergencies. It’s just a part of life. Creating an emergency fund helps you not have a crisis when problems occur. When you have a personal emergency, such as a your car needs new tires, you suddenly have two emergencies:

your car needs new tires
you have a financial emergency

Create an emergency fund (first with $1,000, and then add to it) so you can start managing emergencies in your life.

This post was submitted by Jim Mahlzone.

Stop Drinking Fancy Coffee

Jeremy Reis — Mon, 07 Dec 2009 03:11:32 +0000

If you spend $6 per day on fancy coffee and a snack, that’s over $2,000 per year! Stop spending money on your mocha or latte and invest it in yourself, your knowledge, your retirement, or your kids. If your boss came to you today and said all raises were canceled, but he’s sneaking in a $2,000 merit increase for you, wouldn’t it feel great?

Give yourself that merit increase and stop spending your money away on fancy drinks!