To start getting our of debt, you need to know just how deep in the hole you are. I use Mint.com to track my personal finances and keep a loose budget. It also calculates your total assets, liabilities and net worth. I wanted something more though. If you know anything about getting out of debt, you’re familiar with the “debt snowball” or paying down your debt using the snowball effect. Every person that writes about getting out of debt will mention this at least once, because it’s a powerful tool.
The general idea is you have to make the minimum payments on your debt. If you order your debts smallest to largest then throw anything extra you can at that first debt and pay it off, you take that same amount and add it to the next. When that is paid off, you move it to the next and so on. The outcome is your debts get paid off quicker as time goes on since you always spend the same, just move it up the chain.
A couple of rules or it won’t work:
- Don’t add more debt. If you add debt, you’re defeating the purpose. You’ll need to live on less than what you make. Free up any extra pennies to put towards the debt. Find ways to trim your expenses. You may even need…{gasp}…a budget.
- Earn enough to cover your living expenses with enough leftover to pay the minimum amounts. If you can’t, you’ll need to get creative. Get a second job, sell stuff, form a side hustle, whatever.