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How to Use Debt Snowball to Get out from a Financial Avalanche

How to Use Debt Snowball to Get out from a Financial Avalanche
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Today was a great day. You were productive, spent time with your family, and went to bed on time. You close your eyes ready for tomorrow, only to find yourself awake 4 hours later… This is the time that your brain ruminates your revolving debt as you desperately try to get some rest.

If your financial situation doesn’t change, you know you won’t be able to retire with enough money. You then start to wonder if you’d ever be debt free.

Being in debt is one of the worst places you can be, but you’re not alone.

I and thousands of others have been there. Those who were lucky managed to pay off their entire balances.

You can too. But, you need to take action fast.

The good news is that there are clever ways to be debt free — the debt snowball method. It’s not easy, but if you’re ready for change–here’s how you can get your financial future back in order:

Kickstarting to Get out of Debt

First and foremost, you need to get yourself mentally prepared to before you start your debt-free plan.

1. Commit for a Worthy Cause

There are stories of people having a “magical moment” when they’d decided to become debt free.

The reality is that you don’t need this magical moment. What you need is commitment.

Instead of telling yourself that you want to be debt free, find a reason worth fighting for. Think of what having zero debt would bring to your life.

Would you be able to travel more? Would you be able to sleep better at night?

Despite most Americans carrying some type of debt, having debt isn’t normal.[1] You’ll put yourself in the never-ending “rat race”–living an unfulfilled life. One where you’ll be dependent on a job you hate to sustain a lifestyle you can’t afford.

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By having a clear purpose, you’ll focus on reaching your goal despite the obstacles that come your way.

I’d hit rock bottom when I realized that I was living paycheck-to-paycheck. It was at this moment that I became determined to pay off $6,000 of credit card debt. Because I had a purpose I was able to make an extra $500 principle payment each month–paying off my entire balance off in 18 months.

The same can happen to you, but find a reason worth chasing.

2. Create Your Financial Blueprint

Even after committing, you can still fail at paying down debt.

Why?

Because once you do pay it off, you’d be likely to go back into debt if there’s no direction. It’s easy to stay motivated when you’re first starting off. But, when the going gets tough, it’s here where you’ll need something to keep you motivated.

So how do you stay motivated?

Write down your financial goals. For example, if you want to pay down $3,000 of credit card debt, set a due date.

Bad goal: I want to pay off all my credit card debt

Good goal: I want to pay off my $5,000 credit card balance in 18 months

The second goal is better than the first because you can break it down. You’d need to pay $278 each month to pay off your entire $5,000 balance.

But, you don’t break down a specific goal and forget about it. You need to check on it daily to be sure that you’re on track. A great tool to help you do this is a journal.

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After setting your specific goal, break it down into daily tasks. This could mean bringing your lunch to work so that you have extra money to pay down your debt. Then at the end of each day, check to see if you’ve hit your daily target.

Learning the Debt Snowball Method

Committing to becoming debt free is great, but you need a plan. The debt snowball method is a great place to start.

This strategy boils down to paying your smallest balance first, disregarding interest rate. This is an effective approach because you’ll get momentum going.

For example, if you had $1,000 of debt to pay off: credit card 1: $300 credit card 2: $500 credit card 3: $200

You’d make the smallest payment to credit cards 1 & 2. Then pay as much as possible to pay off credit card 3. In this scenario, it can be tempting to pay the highest balance first.

The problem with paying off your highest balance first is that it’ll take longer. This will increase your odds at giving up because it’ll feel like you’re making no progress at times.

By paying the smallest balance first you’ll get a quick win and stay committed.

So how to use the snowball method?

List all your debts on a spreadsheet. Then figure out how cash you’ll have available at the end of each month using Personal Capital. Get your total expenses and subtract this amount from your monthly income.

    Use as much of this extra money as possible to pay down your debt.

    Unless you have a large debt, don’t worry about accruing interest in your other balances. Pay down your smallest debt, then work towards the next smallest.

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    More important, stop using your credit cards and don’t make unnecessary purchases. Doing this will only prolong the time it’ll take for you to pay down all your debt.

    Should You Use the Snowball Method?

    Many debates whether the snowball method is the best way to pay off debt.

    The answers is–it depends.

    Whatever will help you be debt free is the right choice for you. Using the snowball method carries a cost. Since this method doesn’t take into account interest rates, you may end up paying more in the long run.

    First, calculate how much interest you’d pay to make the smallest payment. If you don’t carry large balances, then it won’t matter how you pay off your debt.

    Another important factor to consider is what will help you be consistent. For example, if you’re someone who needs to get motivation, pay down your smallest debt first. But, if you’re one who likes to be efficient, pay your highest interest credit card first.

    There’s no right way to do this since everyone is different. Paying interest is never a good idea, but if this means that you’d be debt free, go for it.

    Exponentially Eliminate Debt Using an Extra Income

    An issue that most people face when paying down debt is the rate at which they do so.

    The only way to change this rate is by decreasing your expenses or increasing your income. The problem with decreasing your expenses is that you can only do it to a certain point. But, increasing your income is limitless.

    Still cut your expenses as much as possible using tools like Trimm and BillCutterz. Once you do you’re ready to increase your income. Starting a side-hustle is the best way to do this.

    Great side-hustles to start are:

    1. Freelance writing[2]
    2. Affiliate marketing
    3. Start a blog[3]

    None of these side-hustles are easy to create. But, once you earn income from a side-hustle your finances will improve.

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    Whether you love your job or not, having a side-hustle is a great way to pay down your debt faster. You’ll also feel confident knowing that you’re not dependent one income.

    Bonus Strategies to Crush Debt

    The debt snowball method is only one of the many ways you can pay down your debt.

    If you carry a large amount of debt, then you need to explore your other options. Other options include consolidating your debt for a lower interest rate.[4] For example, if you carry balances on many credit cards, you can combine your debt into one single balance.

    Be sure to review your financial goals before making this decision. Credit card companies will offer a 12 to 18 zero interest promotion. Afterward, the interest rate will spike. This can do more harm than good if you’re still carrying a large balance after the promotion is over.

    Like balance transfers for your credit cards, you can apply for a personal loan. Here you’d combine other types of debt you carry into one single loan. This helps you save money on interest and makes your monthly payments easier to make. Crunch your numbers to be sure that you’d be saving money.

    Final Thoughts

    “The best time to plant a tree ”is or was“ was twenty years ago. The second best time is today.” – anonymous

    Imagine going to bed and not worrying about money. You’d have zero debt and better money habits. You’d sleep and feel happier.

    Wouldn’t you want this to be your reality?

    The truth is that such a reality can be yours, but you have to be willing to pay the price. It will take hard work and sacrifice to pay down all your debt. And, despite being on track setbacks are inevitable.

    You already know about a few debt strategies you can use to crush your debt. But, you first need to commit. Then, set clear financial goals and take action.

    Social pressure and other factors led you to accumulate a lot of debt. Although you’re not where you’d like to be today, you can still change your financial future for the better.

    Life is too short to let financial setbacks stop you from being happy. Now go crush your debt. A happier life, one with better sleep awaits.

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    More Resources About Financial Management

    Featured photo credit: Jack Harner via unsplash.com

    Reference

    More by this author

    Christopher Alarcon

    Finance Analyst and Founder of the Financially Well Off Blog & Podcast

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    Last Updated on July 20, 2021

    Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

    Financial Freedom is Not a Fantasy: 9 Secrets to Get You There
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    Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

    Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

    Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

    In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

    Break Free of Your Finances

    Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

    When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

    Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

    Though it seems hard to believe, it is really very simple to get financial freedom.

    To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

    While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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    Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

    1. Stop Unnecessary Spending

    We often spend money inwardly, instead of objectively.

    For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

    To stop this habitual spending, log down all your spending over the course of a month.

    Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

    This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

    2. Plan a Monthly Budget

    This is a great opportunity to get serious.

    Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

    Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

    3. Cut-up Credit Cards

    Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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    If not, you may want to consider ridding your life of the burden that credit cards bring.

    Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

    Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

    4. Increase Savings

    There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

    It’s good practice to save up to 15% of your income.

    Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

    Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

    5. Invest Wisely

    Consider investing in funds.

    Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

    To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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    Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

    6. Invest in Gold

    There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

    You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

    Another way to invest in gold is through ETFs (Exchange Traded Funds).

    These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

    With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

    7. Stash Emergency Funds

    Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

    If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

    Make it hard to get your cash.

    Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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    8. Find Fabulous Mentors

    Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

    If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

    There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

    9. Be Extra Patient

    Patience is the key of financial success.

    Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

    So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

    Financial Freedom for All

    Anyone can achieve financial freedom, regardless of their financial circumstance.

    Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

    Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

    Featured photo credit: rawpixel via unsplash.com

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    Reference

    [1] Hartford Gold Group: IRA Retirement Accounts

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