Today, I am going to continue along with part two of this three part series, What to do with your leftover money. If you missed my last post, you can backtrack here. But I will quickly fill you in. We talked about Step 1, setting up your emergency fund and today I will be going into more detail about Step 2, which is paying off your debt.
This past month was an exciting one for my husband and I because we finally kicked TJ’s college loans to the curb! Hip-Hip-Hooray! What an awesome feeling, such a weight lifted suddenly lifted off our shoulders. If you know this feeling, you can relate… if not, we will get you there. I want you to be celebrating your financial freedom along with us!
To be honest, the thought of paying off debt never really crossed my mind until our accountant asked me last February if my husband and I had any student loans, medical or credit card debt. He told me how important it is to focus on paying these off as soon as possible. He really got me thinking… He ended our conversation by handing me over a book called The Total Money Makeover. He said to me, “If you read anything in this book, read the part I have paper clipped for you in the back,” which was marked ‘Debt Snowball’.
A few days later, I laid on my bed and opened the book to the page he had marked for me. The principle of the debt snowball is as follows… List your debts from smallest to largest by balance. Once a debt is paid off, add the next minimum payment to your current amount. This becomes your new payment. You may ask, why list your debts from smallest to largest? Wouldn’t it be the other way around? The reason you do it this way is so you can start to see things happening, and quickly. It is a psychological way of paying off debt that will allow you to become more motivated by seeing fast results.
The ‘snowball’ term comes into effect when you use your last debt payment to tackle your next largest debt. You are essentially rolling each debt payment into the next. For example, let’s talk about your smallest debt, a $300 medical bill, which costs you $50 a month. Once you pay this debt off, you will continue to pay the $50 a month, just this time you are using it to pay off your next largest debt. As you start to pay off more debt, you start to build momentum and your money stockpiles onto the next debt, until they are all gone! So if you think you are finally done paying your $500 a month car payment…you are wrong! Take that $500/m you were paying and roll that into your next largest debt, (ex: your monthly mortgage payment). Keep your eye on the prize, becoming debt free is the ultimate goal!
This past year has been an amazing one for my husband and I. Together we paid off $2,500 in dental bills, our $2,400 Sleepy’s mattress (1st big marriage purchase!), and tackled $20,000 in student loans. I am here to tell you, it CAN be done! This year, we also started our first Roth IRA, while still being able to put away a significant amount into our 401k. The last and final post of this series will be focused on investing and saving money for your retirement. This is your opportunity to become a millionaire! Stay tuned, you won’t want to miss out on this one!