So Cool, the incredible Neville, from Neville’s Financial Blog, was the first to post a comment. Awesome.
A quick rationale behind paying off debt by smallest to largest balance, and not largest to smallest interest rate. It is pretty simple…It gets you motivated. When you see that first small debt gone, and then you see that next debt gone, it motivates you to keep going. I know that the “math” side of the brain says, “pay off the higher percentage first.” And some people will be perfectly capable of getting out of debt this way. But tons and tons will just give up because they don’t see any “progress.” This is less about the “nerdy” part of paying off debt, and more about the “emotional” side of debt repayment. Seeing that first debt, no matter how small, get killed off, is awesome. It motivates you to keep going and going. It’s like getting in shape. If you say to yourself, “I am going to lose 50 pounds by next year,” then you are apt to lose focus, and fail. But, if you say, ” I am going to walk 1 mile today and eat less than x number of calories TODAY,” then you have the real chance of succeeding. I have found, in the last 2 years of focusing on debt reduction, that getting out of debt is far less about the “addition and subtraction” and much, much more about the emotional reaction the mind has to seeing a debt go bye, bye.
Hi All, this is my first post to my new blog. I will update this blog with information about my journey to get out of debt, stay out of debt, and stockpile tons and tons of cash. I am following the “baby steps” program suggested by Dave Ramsey. If you would like info about him or his 3 hour daily talk show, click here… www.daveramsey.com …I LOVE Dave’s stuff. My wife and I are on step 2. There are a total of 7 steps. I will outline the first 3 today, and go over a little about them for you.
Step 1… Create a “baby” emergency fund of 1000 dollars. Put this 1000 dollars in a savings account or a money market account. You need to be able to get to this money if you have an emergency. I have my emergency fund with ingdirect.com. Right now they are offering 3 percent on their savings accounts, much more than any local bank is offering. You can also receive a 25 dollar sign up bonus for opening an account with them.
Email me at contact for a referral. You will get 25 bucks, I’ll get 10, you’ll be on your way to saving some money, I’ll be one little bit closer to being debt free. Win, win, win, win.
Quick note…Be sure you are CURRENT with all of your bills and payments before you save up the 1000 dollars.
Step 2…This is the step I am on. List your debts smallest to largest, by amount owed, not by interest rate. Pay minimums on all of the debts, and pay AS MUCH AS YOU CAN on the smallest debt. Once you pay off the smallest, keep paying that same amount on the next smallest. Then once you have two debts paid off, pay those 2 amounts on the third debt. Here is an example
Card 1 Balance 100
Card 2 Balance 250
Card 3 Balance 500
So, suppose you had 100 dollars to pay towards ALL of your debt for the month of January. Suppose all cards had the same minimums, say 10 bucks. Now, that means you will pay 10 bucks to Card 1, 10 bucks to Card 2, and 10 bucks to Card 3. Now, you still have 70 bucks left over to pay on debt. Pay all of this on card 1. (Let’s assume, for the sake of ease, that there are no finance charges) Now, your balances for February look like this.
Card 1 Balance= 100-10-70 = 20
Card 2 Balance= 250-10 = 240
Card 3 Balance= 500-10= 490
So, for February, you pay your 10 dollar minimums again, leaving you another 70 dollars for debt repayment. You put 10 more dollars towards Card 1, creating a zero balance. Yay! This card is paid off. Now, you STILL have 60 dollars for debt reduction. DON’T STOP NOW! Put this 60 dollars towards card 2. This is called the DEBT SNOWBALL. Here are your results at the end of February.
Card 1 Balance= 20-10-10 = ZERO
Card 2 Balance= 240-10-60 = 170
Card 3 Balance=500-10 = 490
Keep doing this, using up the entire 100 dollars you have for debt repayment each month. By the way, as you pay off debts, you will might find that you have more and more money each month to payoff more and more debts.
You can see the reason for step 1: The Emergency Fund. If you don’t have the 1000 dollar cushion, then anytime a tire goes flat, or a window gets broken, you will have to run back to Mr. Credit Card for a bail-out. BUT, if you have the Emergency Fund, these unexpected things can be taken care of.
Step 3: After you are out of debt, everything except your mortgage, then you are ready to create a fully-funded emergency fund of 3-6 months expenses. I am on step 2 right now, but when it is time for step 3, I will shoot for an emergency fund of about 10,000 dollars.
I hope you have enjoyed this first post, hope to hear from many of you soon. Thanks,