The Debt Diet: It Works!
There’s always a new diet out there to try, isn’t there?
When I start a new diet or workout routine, I want to see results quickly. It is discouraging to step on the scale week-after-week and not see any progress. We want instant results for things that often take a long time to achieve. Even if we can see SOME movement in the right direction, we are more willing to stay motivated.
So, what if you put your debt on a diet?
The same thing would be true. You’d want to know that there is going to be a payoff for your sacrifices. Our hearts wouldn’t feel any differently about a money diet than it does about a food diet. If I’m going to be on restriction, then I better get some fast results!
Dave Ramsey breaks his Financial Peace University into Baby Steps, and for good reason–so you see results quickly.
If you haven’t read the first two posts in this series, take a peek at them and then come back to the Debt Diet. You’ll need to do Baby Step 1 (Emergency Savings & Building a Budget) before you can fully commit to the Debt Diet–which is Baby Step 2.
If you’re ready, let’s move on to Baby Step 2, which I refer to as “No Fun.” Reality check: it was fun got me in this mess of debt, so it’s time to take a different path. Onward I will march toward freedom!
Baby Step 2: The Debt Snowball or Debt Diet
You wouldn’t start a diet and exercise plan without making arrangements for success, right? You have got to see those pounds dropping early, so you are more likely to stick it out when the going gets tough!
“The plans of the diligent lead to profit as surely as haste leads to poverty.” Proverbs 21:5
First, get rid of your credit cards! Seriously–cut them up. You have your emergency fund, so you don’t need the temptation of your cards in your wallet or your dresser drawer. If you really need to keep one, put it in a container of water and freeze it. That way you can’t use it for impulse purchases, but you can get to it within 24 hours if there is a legitimate need. Literally, put your card on ice!
Having a plan to get out of debt means taking an honest look at every debt you have and listing each debt out from smallest to largest. When listing your debt, include who you owe, your minimum monthly payment, and your total owed. Don’t worry about interest rates, you’re going to knock this debt out so quickly it won’t matter. The only debt you should exclude is your mortgage if you have one.
Now that you have all your debts listed (don’t forget family loans, store cards, car payments, etc.) you’ll pay minimums on everything but the smallest debt. For that smallest
Here’s an example:
$500 Kohl’s card, minimum payment $25
$600 American Express, minimum payment $35
$750 Macy’s, minimum payment $40
$4,000 student loan, minimum payment $90
$15,000 car loan, minimum payment $250
Total for minimum payments is $440
Check Your Budget:
My budget allows me to apply $500 dollars a month to pay off debt.
Start the Snowball:
I am going to pay off the lowest balance card first, which is Khols in my example.
Each month I will make minimum payments on all but the Kohl’s card, plus the extra $60 I found in my budget to apply to my debt. Hey, Kohl’s, here’s $85 for you.
All the other debt will get only minimum payments.
Before I know it, I can celebrate the fact that the Kohl’s card is paid off!
WOO HOO! Congratulations to me!
Kick it Down the Hill:
As soon as Kohl’s is paid off, I will take the $85 I was paying to them and I’ll add it to my next lowest debt–in this case, American Express. $85 + $35 = $120/mth. You can already see, this is going to make a big impact on clearing that debt more quickly.
Way to go! I paid off my American Express card!
Next that $120 will be added to the $40 for Macy’s, for a total payment of $160 to Macy’s. That debt is gone FAST now.
Then we take that $160 and add it to the $90 for the student loan for a total of $250 every month.
And finally, the $250 will be added to the $250 for the final debt, the car. Each payment will be $500 until the car is paid off!
See the Fastest Results:
This approach allows for the greatest traction when paying off debt and the quickest results. Don’t deviate from it. Some people think paying off the lowest interest rate is the best way to pay down your debt, but you see slower results, it’s less motivating, and it doesn’t make a difference when you compare it to the lowest balance to highest. This is the most effective, motivating way to lose the debt!
“The wise woman builds her house, but with her own hands the foolish one tears hers down.” Proverbs 14:1
Building a solid house takes time, but it’s so worth it!
About the author: Vanessa Hull