Get Out of Debt

THE DEBT SNOWBALL

One of the most important things you can do to build wealth is to get out of debt and to stay out of debt.  But how?

Stop incurring new debt!

Create a budget and live by it! You'll be able to see where, as I like to say, you're leaking money.

Save an emergency fund of $1000-$2000. This will help prevent you from going back into debt if, for example, the transmission in your car goes or your washing machine decides to die on you.

Begin a Debt Snowball (Dave Ramsey has helped popularize this technique):

The steps of the debt snowball: 

• List your debts(I recommend the Behavioral Version) 
• Smallest balance to largest balance (Behavioral Version)
• Highest interest rate to lowest interest rate (Mathematical Version)
• Pay minimum payments on all debts except for the first debt on your list.
• Throw all you can afford at the first debt on your list.
• When you've paid off the first debt, add the money you've been paying to the first debt, add it to the minimum you've been paying on the next debt on your list and throw all you can afford at that debt.
• Continue this process until you've paid off all of your debt.

Example:

Debt	Balance	Minimum Payment		Add Previous Debts Payment		Snowball Monthly Payment
Credit Card 1:	$450	$15 + extra $50	+		=	$65
Credit Card 2:	$6,200	$45	+	$65	=	$110
Car Loan:	$6,500	$107	+	$110	=	$227
Student Loan 1:	$17,000	$225	+	$227	=	$452
Student Loan 2:	$32,000	$194	+	$452	=	$646

In this example, you would pay $15 a month (plus anything you can afford to throw at it, for this example, call it an extra $50) to Credit Card 1 while paying minimum monthly payments to the remaining debts. After you have finished paying off Credit Card 1 you would take the $65 you were paying to Credit Card 1 and add it to the $45 you were paying to Credit Card 2 so that you would now be paying $110 a month to Credit Card 2. Continue this process until you've paid off all of your debt. This example is similar to what Andrea and I did when we paid off our debt.