Monday, August 18, 2014

Let It Snow!

Congratulations on completing step one! If you have your $1000 emergency fund - or even if you're on your way there - give yourself a pat on the back. You are one step closer to having no more debt!!

We are now at step two. Step two is where you are introduced to what Dave Ramsey calls the Debt Snowball. The technique has been around for a while and he admits he didn't think it up but he's happy to remind us all of it's existence.

Basically the debt snowball is this...

Start paying your debt off from smallest to largest (mortgage excluded we'll get to that later). You make minimum repayments on everything else but for your smallest debt you pull your reserves. Every cent you can find that doesn't already have a home goes on to that debt. Once you've paid off the smallest debt you move onto the next one rolling over the payments from the last. The reason it's a snowball is because as you cut out more and more payments the amount of money you can put towards the next debt gets larger just as a snowball would when continually rolled in snow.

We start with our smallest debt to keep us motivated. The quicker we see something happening the more motivated we will be to keep at it. The more debt we get rid of the easier it will be to live like no one else.

What I mean by that is right now you should be on a pretty strict budget. You've got your $1000 emergency fund, you're working over time or a second job, you are eating plain basic meals, you're taking the bus instead of the car, you've cut back on take out and entertainment and maybe you're getting a little tired of sausages and mash every Tuesday or working six days a week.

But then something awesome happens. You pay off a debt, a credit card for example that kept eating your hard earned cash in interest payments. It's gone now though, for good. You've already cut up the card and now you can call the bank and cancel it. Right now you're feeling pretty darn good and are looking forward to bangers and mash on Tuesday because you know it's working,you can see it and you've now got one less debt that needs paying off.

You can see that if you are willing to keep at it, if you can stay strict with yourself then in just a few short years you can cut out the second job, change Tuesday nights to steak night instead of sausages and not have to worry about debt...EVER!

According to Mr Ramsey the average debt can be paid off within 18 - 21 months. Obviously your own personal time will be based on the size of your debt and the level of your commitment.

Some families go completely vegetarian, cutting out meat from their diet, to save the extra money on groceries. Don't worry if you don't feel THAT committed. Neither The Husband or myself are big fans of beans and lentils so we are keeping meat in our diets.
There are many other things though that you can do to make it so you have more money to go towards your debt snowball.
if you smoke, quit! If you go to a gym, quit! Both of these are money guzzlers and not needed. Smoking is not good for you and a run around the block, a workout at the local park or finding items at home to use in your exercise regime will save you hundreds.

It all comes down to what you are willing to do but on average you can be debt free with in 21 months.

I mentioned in my last post that the loan we took out for our recent holiday was on a seven year contract. On top of that loan we had two credit cards. With this plan we will be debt free by February 2017. So it will take us 30 months or two and a half years.

A bit longer than the average but still so much better than seven years. Oh and I say we 'had' two credit cards because when we started our journey we did, we paid off the smallest of the two just this week and it felt fantastic!

We are a one income family with two children under five and supporting an elderly parent. We also have one cat, one dog, and two goldfish.

It can be done you just have to persevere. Right now The Husband is working six days a week, it's hard with two young kids, but each time I get stressed I think about what 2017 will mean for us. Two years instead of seven, five years closer to buying our own home!

You can do it!


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