Is getting rid of debt in your New Year’s resolution?
Worried about your debt that has built up over Christmas and New Year’s? Want to know how you can get rid of it quickly and ensure you stay debt free?
In this post you will learn a simple method you can use to snowball your debts away fast.
Every Christmas and New Year’s it’s the same story.
The presents budget is blown. We’re eating out and enjoying the sunshine more. Business income slows down. Don’t get me started on ‘Boxing Day’ sales. Suddenly it’s January and here come the school fees…
OK, so you have accumulated a couple of debts – you know they’re a priority – but where do you start?
You are probably predicting that I’m about to say: ‘Pay the debt with highest interest debt off first.’
Actually, I’m not.
Steps you need to take first.
1. Calculate your current average savings capacity
2. Save a $1000 emergency buffer ($2000 if you are a Barefoot Investor fan)
3. List your debts from smallest to largest
4. Reduce all other debts except your smallest debt down to just their minimum payments
5. Throw every last cent you have spare into paying off that smallest debt first.
Once you have paid off that smallest debt, add the minimum payment of your smallest debt, plus your savings capacity, onto your second smallest debt and continue this process until all your debts (excluding your mortgage or HECS/HELP debts) have been eliminated.
Paying off the highest interest debt first might seem to make sense, however, the difference is quite often negligible. I also like to highlight the ‘momentum’ factor. The motivation you get from knocking each debt out of the park and out of your life for good.
There are many free online ‘snowball’ calculators available if you wish to test the numbers for yourself.
Do’s and Don’ts:
- Do use the emergency buffer first, before reaching for the credit card all over again.
- Don’t use the emergency buffer without once again making it your first priority to save it up again and pay yourself back ASAP.
- Do start saving regularly for next Christmas and New Year’s (even starting this January) with a new adjusted and realistic budget.
- Don’t live outside of your means, ie, spend less than you earn.
- Do always ensure you have some savings capacity.
Not sure how to work out your savings capacity or if you are currently living within your means? You can download my Living Expenses Checklist here: