Starting your Debt Snowball
Debt Snowball Method to Become Debt-Free
Americans are bombarded by ads offering low credit card rates, cash back and other attractive terms. These ads lure consumers into debt traps. Average American has several credit cards owing thousands of dollars on each of them. During the recent economic recession, many consumers became unemployed or got a pay cut. They are struggling to make minimum payments, yet continue to use the cards to pay bills and to buy the basic necessities, digging themselves deeper and deeper into debt. It is not easy to get out of debt, but it is possible.
The first step is to create a budget. When you spend more than you earn, the excess is charged on a credit card creating a debt. Get the last two or three months of bank statements and put every transaction into a category, such as food, utilities, bills, restaurants, clothing, gas, etc. You may be very surprised at how much you spend on some things. Create a budget for each category and don’t let yourself go over the limit.
Second step is to make a commitment to pay off your credit cards and loans. Once you create a budget, you can determine to spend less on certain things and put the extra money towards paying off your debts. Write down balances, interest rates and minimum payment amounts for all credit obligations you have. First, you will apply the extra money to the credit card or loan with the lowest balance. Continue paying at least the minimum payments on the rest of your debts. If you can afford it, pay more than the minimum required. When you pay off the first credit card, add the money from that payment towards the next one on your list. This method is called “snowball.” As you pay off the balances, you will have more money to apply to your next debts and you’ll be able to pay them off much faster.
To pay off your debts faster, you will need to pay more than a minimum payment. If you cannot pay more than a minimum payment, consider reducing some of your expenses or getting a second job. A word of caution: as you pay your debts off, make sure that you don’t go back charging more purchases. Before making a purchase, consider if you really need it. Create a list of things you would like to have, set some cash aside from each paycheck and then buy things only when you have enough saved.
Once you pay off your debts, stick with your budget, build an emergency savings fund for unexpected expenses, such as car repairs or buying new appliances. Save money for vacations and other large purchases. Make a commitment to a debt-free living.