Today on GMA they showed a couple who paid off $100+ of debt in 3 years! Amazing. They scrimped and lived “below” their means – and where debt free in 3 years!!! That is quite a feat and indeed a great GMA segment. They did it using the Snowball Method.
From Wikipedia, the free encyclopedia
The debt-snowball method is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later
Methodology of the Snowball Method
The basic steps in the debt snowball method are as follows:
- List all debts in ascending order from smallest balance to largest. This is the method’s most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
- Commit to pay the minimum payment on every debt.
- Determine how much extra can be applied towards the smallest debt.
- Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off. Note that some lenders (mortgage lenders, car companies) will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction. Credit cards usually apply the whole payment during the current cycle.
- Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
- Repeat until all debts are paid in full.
Usually the smallest debt is the balance on credit cards – and these are usually the ones with the highest interest. The credit cards should be put away – because you do not want to acquire more debt while paying off debt. You basically have to go to a pay cash life style.
LIVING below your means
This is basically saying that you cannot spend all you make. You would need to set an amount that will be paid on the smallest debt each month until it is paid off. Cutting corners on all of your living expenses with the goal to pay off the smallest debt. Can you imagine the feeling of success when you rid yourself of just one of your debts? Draw a nice red line right through it and move on to the next.
There are numerous articles and examples on the internet, and you may gain more incentives by searching them out. Debt free is a wonderful feeling!