Debt-Free Forever (10 page)

And now we come to the best strategy for taking those payments and making them really work for you if you haven’t consolidated or refinanced your home. You know how much you must put toward debt repayment to get out of the hole. But how you apply those payments makes all the difference in the world. The strategy is called Snowballing, and it involves putting your money where it’ll do the most good. Here’s how it works:

1.
Having figured out how much your monthly debt repayment amount must be—in our example, it’s a whopping $1,068.95—put that amount into your budget.

2.
You use as much as you need to make the minimum payments on all but your most expensive debt. In our example, it would take $846 a month to make the minimum payments
on all the debt. It is very important that you keep up with all your minimum payments to protect your credit history from becoming bruised. Even one late payment could reduce your credit score and result in higher interest rates. So make sure you make all your minimum payments on time every month.

3.
Take all the rest ($1,068.95 – $846.00 = $222.95) and apply it against the debt with the highest interest rate. In the case of our $700 department store card, the payment of $250.95 (the minimum payment of $28 + the $222.95 we are snowballing) means it will take less than three months to get the balance paid off.

4.
Once the balance on your most expensive debt is paid off, start all over, applying the amount above the minimum payments to the next most expensive debt. The total debt repayment amount does not decrease until all the debt is gone, so don’t pat yourself on the back and go shopping. You’ve still got a long way to go.

GAIL’S TIPS

Now you’re going to snowball the amount you were paying on the first debt you’ve just vanquished and put it into the payment against the next debt dragon you must face. On our sample list it’s the $1,200 owed on the department store credit card. Add the amount for the minimum payment for that debt ($48) to the amount you were using to repay the previous debt ($250.95), and you’ll have the amount ($48.00 + $250.95 = $298.95) that you’ll be using to pay off the $1,200 department store credit card balance. It’ll take about four months to slay the second debt dragon ($1,200.00 ÷ $298.95 = 4.0 months). As each debt is paid off, you continue to snowball the amount from the debt just paid off by adding it to the minimum payment on the next most expensive debt on your list.

Do I actually have to say that you should not be using your credit for anything at all at this point.
NOTHING!
There is no good reason to spend on credit if you’re trying to get to debt-free. If you’re still using your credit, you’re not really serious about this. If you are serious, you’ve chopped up your cards so you can’t use them, and you’re living within your means.

If you have to wait until your next pay period to get started, or until you know you have some extra money, or until [insert
your pathetic excuse here], you’re procrastinating. How’s that working for ya? Any closer to being debt-free?

If you want to be debt-free you must start TODAY. “But I don’t have the money,” you say. Well, then, either you’ll have to find a way to make more money or use the money you do have in a smarter way. Go over your budget with a paring knife and trim out all the non-essentials that are sucking away your money.

Right now. I mean it. Grab your budget and start trimming your expenses.

How much did you come up with?

Do it again.

Now how much do you have?

Do it again.

And again.

You want your budget to be so tight it squeaks.

GAIL’S TIPS

Add whatever you’ve squeezed out of your budget to the payment on your most expensive debt. If you managed to chop $300 from your expenses, add that $300 to the payment on the first debt on your list.

GAIL’S TIPS

Every penny counts. Start carrying a notebook around with you, and whenever you save money on something—because you used a coupon, because you got it on sale, because you decided not to buy whatever it was that was on your list—write it in your notebook. When you get home at night, make a payment of however much you’ve saved that day against the debt that’s at the top of your list. (This assumes you don’t end up getting dinged for bank charges on every payment. If you have a transaction limit, save it all up and do it once at the
end of the month.) Now you’ve put what you saved to good use, as opposed to leaving it in your cash flow where you just end up spending it on some other crap. Scour your house for all your change. And every time you empty your pockets of change, add it to your change pot. At the end of every week or month, deposit it to your bank account and then immediately use that money to make a payment against your most expensive debt.

Have you heard? Less is the new more! If you have to sell stuff to get out of debt, that’s what you have to do. Go through your home, room by room, and choose two things you can live without. Have a yard sale, list things on craigslist or eBay, or sell things through a consignment shop. You might not get a lot for whatever you’re selling, but whatever you get is money you won’t have to pay interest on. Apply that money to the debt at the top of your list.

GAIL’S TIPS

The discomfort you’re experiencing from being in debt is good if it keeps you focused on getting back into the black. But if you can’t stand the weight of the debt, you want to get rid of your debt faster; instead of using 36 months as your end date, choose a shorter term. Thirty-six months is the longest it should take. But becoming debt-free forever may be so important to you that you choose to set a goal of being out of the hole in 30, 24, or even 12 months. While some people can plod their way to debt-free forever, maintaining a balanced life while they do so—and this is my preferred approach to everything—there are some folks for whom a single-minded focus is a key part of their success in getting to debt-free. These are the people who tend to dive into everything they do with fervour. If you are one of these people, setting a shorter timeline and busting your butt to get to debt-free may be the only way you can do it. So be it. Do whatever it takes.

If you look at the work you’ve done and think it’s all too hard, there’s no point, it’s a lost cause, and you’ll never be debt-free, then you’re
choosing
not to take the steps necessary to get yourself out of debt. You can’t whine about being in debt. Nope. You’ve made your bed and now that it’s full of fleas, you’ve only the dog in the mirror to blame!

You’ve decided to become debt-free. You’ve taken the bull by the horns and not only made a budget, but come up with a debt repayment plan that will see you in the black in three years or less. While you still have a bunch of cards in your wallet,
you’re determined to trim your exposure to credit. Here’s what you should do:

Look back over your credit card statements to see which ones are the oldest and have the healthiest credit histories—read “no missed or late payments.” You’re going to hang on to these to keep your history intact until you’ve built a sparkling credit history elsewhere.

Choose the two (at the most) cards that you want to keep. These cards may have lots of benefits: travel bonuses, cash back, really low interest rates, whatever toots your horn.

If the card(s) you want to eliminate has a good history, start by reducing the limit on the card to reduce your credit exposure, but keep the card active. After six months, you should have built up a more solid history on your two newer cards, and can close the old card(s).

GAIL’S TIPS