Debt snowballing!

I have been so excited to write this post, that I waited until I had enough time in my busy schedule to actually sit down and do a good job! John and I had so much fun debt snowballing, that we almost want to rack up some more and do it again! (Just kidding) First of all, let me tell you a little bit about what a debt snowball is...

When you make a plan to attack your debts and monthly payments, you need to sit down and write out how much you owe on each account, and what the minimum payment is. Some financial advisers recommend attacking the debt with the highest interest first, and that does make some mathematical sense, but a more reasonable and much more successful plan is to attack the debt with the SMALLEST balance first! This new mentality is similar to setting a weight loss goal of cutting out dessert once a week versus planning to run a 5k right off the bat. Start with baby steps!

So when we laid out our debts (and we did not include my student loans in our snowball, just consumer debt) we had the following:

American Eagle retail card: $300/ $30 month
Friedlanders Jewelers: $800/ $170 month
First Financial CC: $1800/ $100 month
Best Buy retail card: $2200/ $200 month
B of A Consolidation: $10,000/ $250 month (YIKES!)

Now the principle of the debt snowball says that you pay the minimums on all debts, and throw every extra penny (after building your emergency fund first) at the smallest debt. Then once that debt is paid off, you start attacking the next debt with its minimum payment, what you used to be paying toward the last one, and all extra money. You keep doing this until you are working on the last debt with what you used to be paying toward all of your debts! Doing it this way solves two main problems with trying to get out of debt: First, since you are attacking the smallest one first, you get almost immediate gratification. We were able to pay off the smallest retail card in our snowball that first month. So we got to pat ourselves on the back for getting out of under one of our cards immediately! Second, once you are getting rid of a payment every time you pay off another card, if anything catastrophic should happen, something that is too big for an emergency find to fix, you now have that much less financial liability to slow you down. You will understand this second benefit more as I explain the process.

Now, like I said, we were able to pay off the first of our credit cards that very first month! We scraped together $300 and just wiped it out. This now allows us to start attacking our next debt with even more strength! Friedlanders now gets their same $170 a month PLUS the $30 we used to pay toward American Eagle for a total of $200/month, PLUS any extra money we can scrape together. It is nice to be able to let go of the stresses of all of your bills and just focus on one at a time. We were still paying on all of them, but it was so freeing and peaceful knowing that they were all going to get paid off if we just stick to this plan.

I really strive on visuals when working toward goals, so I thought to set up our bill payments kind of like they do during fundraisers with those thermometer type posters. I laid out each bill with our total owed at the bottom and the goal of a $0 balance at the top, and colored in what the new balance was each month when I got the new statement. It looked something like this:

After I started doing this, a strange thing happened...I started LOOKING FORWARD to getting our monthly bills! Crazy, I know. The physical reward of getting to color in the arrows every month was enough motivation to keep at it and keep sacrificing and working hard. I really started seeing progress in getting out of debt, which seemed so hopeless just a few weeks before. If you use this idea though, you must only color in the arrows when you get your new bill with the new balance however. I made that a rule for two reasons: First, if you color it in when you make the payment, like when you pay $200 on a $1200 balance and coloring it down to $1000, it wont work out when you factor in interest. You will receive your next bill and it wont say $1000, it will be more like $1045 because of the interest. If you color it in when you get your new statement, then you will be coloring in the correct amount. Second, the physical reward of making a dent in your balance like that when the bills comes changes your mindset like it did for me, and making those payments seems like less of a bummer. I looked forward to getting the new bill so I could go color in the new balance...and the more I got to color the happier I got!

As the months went by, they started filling up and John and I got to see every day when we walked by them how much progress we were making. Once the second bill was paid, we took the $30 from the first one, the $170 from the second one, and we applied it toward the third one and were paying $300/month instead of $100. That made it go so much quicker as well! Then after that one was paid off, we took that $300/month and applied it to the next one and were paying $500/month instead of $200! Meanwhile, our last debt of $10,000 was barely making any progress only getting a mere $250/month, but I knew what was in store for that little brat. Once we had all of the others taken care of, we then applied that $500 toward the biggest one for a whopping $750/month! Plus we were still throwing any extra income or savings every month toward it as well, so it was more like $1000/month. Imagine how quickly that little sucker filled up!!! When we were all finished, our wall looked a little different :)

Man, was that a satisfying event when I got to fill in the last little bit on our final arrow. We had gone from over $15,000 in debt, down to $0 in a little over a year. That may not seem like a lot to some people, but to us, it was amazing. Mainly because I was not seeing an end in sight, and it was putting an emotional toll on the both of us and our marriage. Being financially free allowed us to then take a vacation to Disneyland (since we didn't get a honeymoon after our wedding) using CASH! And it also allowed me to finally feel financially secure enough to think about starting a family. Also during the snowball, we had that car crisis where we needed to come up with some cash fast, and since we were at the stage of working on the last debt, we were able to take a "break" from our snowball that month and only pay the minimum on that one card, and that freed up over $500 in our budget that month! (That is what I was talking about earlier, which is one of the advantages of getting them paid off one at a time)

We did eventually attack some of the smaller student loans as well using the same strategy, but then ended up consolidating the rest when I got pregnant. I figured lower payments now would allow me to stay at home more and we could work hard on them later when I started working full time again!

I hope this how-to post helps you to make a plan on getting out of debt and have fun while doing it! We worked really hard to get out of all that was crushing us, and even though we haven't always been perfect since, we are so much better off because of it!!

Until next time,
Sarah