As the year winds to a close and we shift our attention to the new year that’s about to begin, the next few weeks may be the right time to assess our existing financial situations and consider what new plans we’d like to implement for the following year. For many Americans, one of those plans could be to finally get debt-free.
Links:
For a more visual explanation of the debt snowball method watch this short debt snowball explainer video on YouTube
Watch our Pay Off Debt: Your Path ...
As the year winds to a close and we shift our attention to the new year that’s about to begin, the next few weeks may be the right time to assess our existing financial situations and consider what new plans we’d like to implement for the following year. For many Americans, one of those plans could be to finally get debt-free.
Links:
- For a more visual explanation of the debt snowball method watch this short debt snowball explainer video on YouTube
- Watch our Pay Off Debt: Your Path to Financial Freedom webinar
- Check out TCU University for more financial education tips and resources!
- Follow us on Facebook, Instagram and Twitter!
- Learn more about Triangle Credit Union
Transcript:
Welcome to Money Tip Tuesday from the Making Money Personal podcast.
Getting out of debt is a noble goal, one worth pushing towards. If you’re feeling the burden of debt, one very effective method can help you pay down that debt and reach financial success. But when it comes to this venture, where does one start? How do you know the plan will be a success? That’s what this debt snowball method is for.
In this tip, I’ll explain the debt snowball, how to use it to eliminate debt, and share a few additional thoughts to keep in mind while following the plan.
One of the biggest challenges many people face when paying down multiple debts is determining which debts take priority. Do you pay off the oldest debt first? The largest debt first? A certain type of debt first? This often paralyzing decision can make it hard to advance toward the goal. Juggling different bills with varying balances can be tricky to organize, so you need a solid and practical plan to focus on and eventually eliminate debt.
That’s where this plan comes in. The debt snowball works by organizing your payoff plan to pay down your lowest debt first, then using that freed-up cash to put towards the next largest balance, and so on.
Start by putting all your debts in order by total balance from smallest to largest. Then focus on making larger payments to the smallest debt while making only the minimum payments on the other ones.
For example: If you have three debt balances, one for $3,000, one for $8,000, and one for $10,000, focus on paying more towards the 3K one and pay just the minimums for the 8k and 10k ones. Keep paying your bills this way until that lowest debt is completely paid off.
With one debt gone and out of the way, take all the money you were paying towards it and now put it towards the $8k one, continuing to pay the minimums on that $10k debt.
Keep doing this until the 8K bill is gone. Then, put all that freed-up cash from both eliminated debts towards that last 10k debt.
The effectiveness of this strategy is that it increasingly builds your cash contributions towards debt every time one balance is paid. So, by the time you’re on that last debt, you’re shoveling money at that balance, and it will decrease at a more rapid pace.
For anyone prepping to give this a go, here are a few things to keep in mind when you work your own debt snowball:
- This plan works best with a budget. Your debt snowball method won’t work if you don’t budget. The budget provides a framework that distributes your income in a specific manner. To pay off debt, you need to know how much money you have coming in and going out. It’ll also help you determine how much to allocate toward each balance as you build your snowball, putting every free dollar toward your debt.
- Get organized and stay organized. Even though you have a budget, keeping all your information organized is essential. Set up dedicated folders in your email for electronic bills or statements, so you know exactly where to go to see them. If you get paper bills, store them in a dedicated folder or envelope so they don’t get lost. Also, create a spreadsheet or use a debt payoff app to keep all your balances logged and up to date. It’ll also allow you to watch each bill as it gets paid down and eventually eliminated.
- Keep your focus with visual reminders. Find a way to keep your goal top of mind. Some people write it on an index card and leave it by a mirror or on a fridge so they’ll see it every day. Keep one in your car or on your phone as a constant reminder that you’re working towards something important.
- Celebrate the small wins. The journey isn’t any fun when you can’t enjoy the process. When you pay off a debt, celebrate the victory. Find a way to treat yourself for your hard work and accomplishments. Just make sure to keep it within budget.
- Be patient. A system like this doesn’t work immediately. It takes time and diligence to get rolling. Keep a steady pace and understand that with some time, patience and perseverance you’ll reach your goal and look back on the long journey that brought you there.
For a deeper explanation of paying down debt and a visual walkthrough of the debt snowball method, check out our Paying Down Debt webinar and our Debt Snowball Method video clip on our YouTube channel.
If there are any other tips or topics you'd like us to cover, let us know at tcupodcast@trianglecu.org, and don't forget to like and follow our Making Money Personal FB page and look for our sponsor, Triangle Credit Union, on Instagram and LinkedIn to share your thoughts.
Thanks for listening to today's Money Tip Tuesday. Check out our other tips and episodes on the Making Money Personal podcast.
Have a great day!
