You know that I am not a proponet of the traditional JOB. In fact, just the mere mention of the word makes my skin crawl. However, if you do choose to go that route then I’d like to suggest that you at least use your money more wisely.
I like to introduce you to the “Snowball Effect.”
Many of you may of heard of it before but how many of you really use it? This is a very popular strategy taught by Dave Ramsey and others who preach about debt elimination.
The reason I like it so much is because it’s simple. I love simple. In fact, last month I put together a simple plan for my mother so that she could eliminate her $4,000 credit card debt in 1.5 years. Now, without this plan my mother invariably would have never paid off this credit card debt.
Here’s essentially the plan that I put together for my mother. You can do this as well.
My mother had 4 credit cards totaling approximately $4,000 in debt. She was only paying the minimum payment on the cards. For more on the minimum payment trap go here.
My first suggestion to my mom was to either freeze the credit cards that she was paying off or cut them up. She chose to cut them up which I feel is a much more prudent choice.
Next, I arranged here credit cards from the smallest to the largest according to their balance. Her smallest credit card balance was approximately $1,000 and she was paying about $25.00 per month. This was a little more than the minimum payment required. She was also paying a little more than the minimum on the other 3 cards. I suggested that she increase her payment on the lower balance card to $100.00 and just pay the minimum on the other 3 cards until the first card was paid off. She agreed.
Then we calculated the approximate time that it would take to have the lower balance card paid off. So if you divide $1,000/$100 you will arrive at about 10 months to totally exhaust the balance on the card. To keep this example simple I’m not taking into account that some of the increased payment amount will go towards interest.
After 10 months she will be down to 3 credit cards. She now takes that $100 that she was paying on the lower balance credit card and rolls it with the payment on the next highest balance credit card. (Thus the name of snowball…it just keeps getting bigger) So if she were paying $50 a month on the 2nd card she would now be paying $150 on the second card until it is eliminated just like the first card.
She will rinse, lather and repeat the above process until each credit card balance is completely exhausted. As we were doing this exercise we discovered that my mom only has about one year left to pay on her car. Once her car is paid for she can then take the payment she was making on the car and actually roll that into the credit card debt which means she will be debt free even quicker.
There are many benefits to the “Snowball Effect” and here are just a few.
- The momentum you gain by paying off a credit card is contagious
- You can see a light at the end of the tunnel
- With a plan you now have a specific strategy to eliminate debt. If you have no plan it will never happen
- You consciously are forced to look at how much debt you have. Out of sight is definitely out of mind
- You experience a feeling of euphoria thinking about how it would feel to be debt free even before the debt is gone
Here’s a direct quote from my mom, “I feel debt free already.”
Another variation of the method that I described above is to arrange your credit card from highest to lowest according to interest rate. The thinking behind this method (which is true) is that if you eliminate the credit cards with the highest interest you will end up saving thousands of dollars in the long run.
I personally don’t prefer one method over the other. However, I would suggest that you begin today to get rid of your debt whether you use the “Snowball Effect” or some other method. You don’t have to get of your debt either. You can continue to be a slave to your lender. It’s your choice.
That’s my spin on it.
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