Thursday, June 30, 2011

Baby step 1 and 2

I put these two steps together because somehow we actually already had $1000 in savings.  It was in a savings account I had from before we got married and just never moved it to our joint account, so hey, we were on our way!  One down, 6 to go!

Baby step 2 (paying off all non-mortgage debt) is not as easy.  We were looking at mountains (to us anyways) of bills.  I am going to be very real here and go ahead and list them...
so you can see it is conquerable, it will just take time.

Rooms 2 Go$1,500
Credit Card #1$3,600

Holy Cow!!!  And our monthly MINIMUMS on these were $857/mo.  What were we thinking!  Do you know what we could do with an "extra" $800+ dollars a month.  I did.  I had all kinds of ideas.  That $800 was what was standing between me and staying at home and raising my son.  I desperately wanted that $800 to die in the most painful way possible.  So, we buckled down and started using the "snowball" principal to get our debts under control.  What is a snowball?  I'm so glad you asked.  :)

The way the snowball works is you write out your budget including all of your minimum monthly payments.  The amount you have left after all of your expenses is your starting snowball.  Lets say you have $250 left each month.  Here is an example of how this works.  To make it easy we'll say you have 4 debts.  A medical bill of $500, a credit card of $1000, a credit card of $1500 and a car of $7500. 

BillMonthly AmountTotal Amount
Medical Bill $80 $500
Credit Card 1$15 $1,000
Credit Card 2$20 $1,500
Car$200 $7,500
You would add your "snowball" amount to the smallest total debt each month.
As you pay off one debt, the amount that is freed up each month gets added to the snowball making 
bigger and bigger and paying off your debts faster and faster.  It is amazing how fast it goes once you 
get started.
Month 1
Medical Bill$320 snowball payment$180
Credit Card 1$15 $975
Credit Card 2$20 $1,480
Car$200 $7,300
Month 2
Medical Bill$180 $0 *You've paid off your first bill in only 2 months!
Credit Card 1$155 snowball payment$820
Credit Card 2$20 $1,460
Car$200 $7,100
Month 3
Credit Card 1$335 $485
Credit Card 2$20 $1,440
Car$200 $6,900

You can start to see how fast it goes.  Your snowball has already grown from $250 to $320 and it will just keep getting bigger with each debt you pay off.  If you can sell something (kids clothes, furniture you're not loving, a car with a large payment to get into one with a smaller/no payment) you can go so much faster.  This step might take a year or two, depending on how much debt you have and how big your snowball is, but it will work and it is well worth it once you're on the other side of the seamingless unclimbable mountain.

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