Help! I have debts but don’t know where to start!
Do you feel like the times when you finally start getting ahead or make more money you end up feeling lost or spend it on unimportant things because you just don’t know what you should be putting the extra money towards first?
I have the answer for you.
First start by ensuring your living expenses are less than your income. This is called ‘living within your means’. It ensures you won’t be falling further behind in debt while you are trying to dig yourself out at the same time.
At this point note to yourself what the difference is between your income and your expenses as this is your savings and will be used towards eliminating your debts.
Also do a brain storming session to list any long term expenses that seem to always creep up on you and would normally cause you to reach for that credit card or finance loan again. Break them down into regular monthly amounts and ensure these are included in your living expenses so you are still spending less than you are earning.
Just before you start concentrating on those debts, save up a $1000 buffer or float in a separate savings account and treat it as your own credit card. This ensures that in an emergency you don’t need to increase the very same credit card you are actually trying to pay off.
If you find yourself dipping in to your emergency buffer due to unforeseen or forgotten expenses, add them to your budget to start saving it up as a small monthly amounts so you can be prepared the next time they occur. Pay back any money you use from your $1000 emergency buffer back into your account again as soon as possible. This buffer is always your priority.
Now we look at all your debts, excluding your mortgage. List them all out. Include the outstanding balance, the interest rate and the minimum payment.
The snowball method
At this point I prefer to use a system called ‘the snowball method’ which is when you pay off each debt by smallest first, through to the largest by making the minimum payment on all your loans except the smallest, which will also include your extra savings. (Ie. the difference you worked out between your income and your expenses.)
You might also like to consider using any one off windfalls such as tax refunds, bonuses, garage sale money, inheritance, birthday money, overtime or any other unexpected income to pay off that smallest debt as quickly as possible.
When that smallest debt is finally paid off, transfer the regular payment you have been making on the smallest debt onto the second lowest debt and concentrate on paying it off as soon as possible. Then when the second debt is paid, continue in the same way on the third debt, now transferring both the first and second debt payments onto the third etc.
The reason I love the snowball debt is that when you start knocking off those smaller debts, the payments increase without needing to change the amount you are putting towards your debts and the results and momentum are very encouraging.
Some would argue that the ‘avalanche method’ which is when you concentrate on paying the highest interest loan first, is a better option, however in most cases there is only a small margin of difference.
When I conduct a Debt Breakthrough Strategy Session with my clients, these are the steps I work out for them including how long these debts will take to pay off by comparing the ‘avalanche method’, ‘snowball method’ or a custom arrangement focused on the clients own priorities to find the most effective and quickest debt reduction strategy for their unique situation.
If you like the idea of getting your finances sorted out for the better, putting together a strategy to get out of the debt cycle and make a change that you will be thanking yourself for in the very near future, then you too can book in and see me for a Debt Breakthrough Strategy Session.
You can register here to get started:
Debt Strategy Session