Lets talk about the elephant in the room...DEBT.
In one of my previous entries on Creating a Budget I mentioned the snowball effect given to us by Dave Ramsey. Today I would like to dive deeper into this very method.
Now, lets imagine there is a small snowball at the top of a hill. As it continues to roll down the hill and gets larger and larger. This is comparable to debt.
Make a list of all your current debt starting with the smallest one first. For example:
Total amount to pay towards debt each month: $1700
Credit Card debt- $1,560 minimum monthly payment: $40
Student loan debt- $2,150 minimum monthly payment: $50
Car loan debt- $15,620 minimum monthly payment: $350
Home Mortgage- $120,500 minimum mortgage payment: $1200
Now the idea behind the snowball effect is to pay off the smaller debts first. We know that the minimum amount must be paid to all the other remaining debts first. However, with the extra money you have decided to put aside to pay towards your debts you will bundle it all on the credit card payment in this example, or whatever is your smallest accrued debt. As shown:
$40+ $60 (extra money set aside to pay off debt)= $100 payment towards the Credit card each month until it is fully paid off.
After, sometime when all your extra money has finally paid off that first small debt (Credit card in example); then the amount that was going towards the credit card debt in this example will now all be applied to the student loan so it looks like this:
$50+$40+(extra money to pay off debts or $60 in this example)= $150 now going towards the student loan debt.
And as the saying goes, it snowballs from there. Hopefully, by now you get the picture and idea behind the snowball effect. My family has been using this method for a while now and it works wonders! It has helped me and my spouse save more money, and be able to use that money that we used before on paying off debts, to do other fun things like vacations and building our emergency fund!
If you enjoyed this entry or found it useful then please subscribe for future posts!