Paying off debt can be overwhelming and it is no easy task. But doing so will help provide so much relief by eliminating that heavy burden. And, it’s a critical step towards financial peace of mind, and ultimately financial independence.
The Debt Snowball Method is a debt elimination strategy. It’s a simple, yet effective approach to getting out of debt popularized by Dave Ramsey, a renowned personal finance guru. Dave has helped thousands of people get out of debt using this method and it will help you too!
It focuses less on math and more on behavioral changes. For more on the theory of why your brain will like the debt snowball method, clickhere.
Why is it called the Debt Snowball?
The process is named the “snowball” method because the payments you are sending to creditors grow larger over time, much like a rolling snowball.
Imagine making a snowman as a kid. You start with a snowball and then roll the snowball around the yard. It starts out small, but with each rotation, it adds a layer of snow, getting bigger and bigger, as it accumulates more snow. Eventually, your snowball looks more like a boulder than a snowball.
How the Debt Snowball Method works
With the debt snowball method, you pay off debt in order of smallest to largest, regardless of interest rate. You make minimum payments on everything but the smallest debt and attack that one with a vengeance. When that bill is paid, you move to the next smallest and repeat until you plow through all of your debt.
Step 1: List all of your debts from smallest to largest. Write them down. (For an idea of how to setup your list, see below). Step 2: Pay the minimum payment on every debt, except the smallest debt. Step 3: Pay as much as you can towards that smallest debt until it is paid off. Step 4: Repeat the process by paying as much as you can toward the next smallest debt until each debt is paid in full.
Example of Worksheet to list out debts and keep track of the balance and payments.
Why use this method?
You gain a psychological momentum achieving quick wins. The advantage to using the debt snowball method is that you see instant progress and will be able to pay off a debt completely in only a few months.
Personal finance is only 20% head knowledge. It’s 80% behavior!
Dave Ramsey
This approach is all about behavior modification. Be seeing results fast, you’re more likely to stick with the program and rid yourself of debt for good.
Why Does the Debt Snowball Method Work?
The debt snowball works because it’s all about behavior modification (not math).
This method is structured to help you achieve wins as quickly as possible since you’re making additional payments on your smallest debts first.
Neurotransmitters are chemicals that transmit between neurons or nerve cells. Dopamine, the “feel good” neurotransmitter, helps us focus and makes us feel happy when we meet our goals. By completing small goals rapidly, you are getting dopamine spikes more often. This makes you feel good, which, in turn, makes you want to repeat the behavior.
It also keeps you focused on your plan. Small victories matter.
Visually tracking your debt journey can also help you feel gratification because you SEE PROGRESS. So, write them down, setup your chart, and tack it to your fridge – “gamify” your debt pay-down!
Have questions? Please feel free to comment or email me. I’d love to hear from you!
Let’s develop some smart money habits together! ~SMJ
The thought of budgeting often brings a negative response from people. Many people are turned off by the simple term budget. Some of my friends refer to it as the “B” word. The term is associated with restrictions and a lot of hassle and headaches. Can anyone relate?
While I realize it can have a negative connotation, I can not emphasize enough the importance of creating AND maintaining a budget.
I really feel like this is the most important thing you can do for your financial future. Regardless of whether you think you are too poor to budget or too wealthy to budget, you’re not.
Reasons why Budgeting is Important
1) Helps You Reach Your Goals
A budget is a plan that helps prioritize spending. With a budget, you can move to focus your money on the things that are most important to you. It may be getting out of debt, saving up for a home or preparing for retirement. Your budget creates a plan and lets you track it to make sure you are reaching your goals.
2) Helps you Save Money
People who do not have a budget tend to save less money than people who do. This is because when you budget, you assign your money to do certain things. It allows you to automatically put money into a savings or investment account each money (#smartmoneyhabit). A budget helps prevent debt and save money. As you save, you will begin to build wealth. Building wealth is what provides true financial freedom and peace of mind for your future.
3) Helps you Stop Worrying
Most people don’t like the restrictions that having a budget puts on them. However, you decide how much you spend in each category. So, if you want to put a large portion of your money towards leisure activities, as long as you’re saving and meeting your other needs without going into debt, you get that choice. BUT, once you setup limits, you need to stick to them.
4) Budgeting Puts You In Control
If you feel like you’re not in control of your money and you’re constantly wondering where it went and what happened to it, budgeting can put you in control. It allows you to prioritize your spending, track how you are doing, and realize when you need to stop.
Budgeting is the most essential part of financial planning and the best thing you can do for your financial future!
How To Create A Budget
Step 1: Determine why you want a budget
According to surveys, only one-third of all households live by a strict budget. By deciding to budget, you’re joining a select minority — and your decision will pay off! Budgeters are almost twice as likely to report no financial worries compared to spenders, and they’re less likely to live paycheck to paycheck or struggle with finances. Sold yet?
While budgeting is always a GREAT decision, it helps to define goals before you start the process, since the real reasons you’re budgeting may impact choices you make during the process. Here are a few reasons to create a budget:
Finding a way to save more money
Reduce debt
Reduce overspending on problem areas (Starbucks anyone?)
Making sure your spending reflects your goals and values
Breaking the paycheck-to-paycheck cycle
Avoid spending money you don’t have
Meeting long-term financial/retirement goals
While it may seem silly to think about your motivations, psychology plays a big role in how we handle money. In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating. That’s a lot of benefits right there.
Creating a budget makes it more likely goals will be achieved.
University of Maryland
Step 2: Dive into your current spending habits
Before you can create a realistic budget, you need to know how much you are currently spending. If your budget isn’t realistic, it’s nothing more than a wishlist.
I recommend looking back at your bank and credit card statements for the last 3 months to get an average of each expense category (see below for a list of expenses you might include in your budget).
This is where most people stop. I’m just going to be honest here…you just have to do the work here.. THERE ARE NO SHORTCUTS. Figuring out where your money is going must be part of the budget process.
“You just have to do the work here.. THERE ARE NO SHORTCUTS.
Financial Jackson
Write down all of your expenses in either a spreadsheet or a notebook. I’ve shown a picture of a sample budget worksheet below for visual reference. If you are struggling, here are a couple of resources I think are good, that can help you create your master budget worksheet:
Dave Ramsey’s quick start budget forms click here.
Spreadsheet for creating your master budget worksheet click here.
Sample Master Budget Spreadsheet:
Notice how much income is used up by student loan debt! See my write-up on the Student loan debt crisis here.
Step 3: Write Down Your Total Income
This is your total take-home (after tax) pay. Factor in income from all sources including:
Wage income
Money from side gigs
Alimony and/or child support
Business/Commission income
Income from investments
Social Security
If your income is variable, one of the best budgeting approaches is to pay yourself a salary. This means you’ll decide on a monthly “salary” to base your budget around – I recommend using a worst case scenario here. If/when extra money comes in, save it in case of a bad month later.
Step 4: Subtract Expenses from Income to Equal Zero
This is called zero-based budgeting, meaning your income minus your expenses should equal zero. When you do that, you know that every dollar you make has a place in your budget. If you are negative, look at your budget to check for errors first. If you are still over, look to see what you can cut – Hulu, Disney+, cable, dining out, etc.
Step 5: Track Your Spending
Making a budget is only the first step. You have to figure out how to live by your budget. Now that you have created a Master Budget Spreadsheet, track your spending every week. Every day if you can. It’s the only way you will know if your spending is aligning with your plan.
Here are some ways to track your spending using apps that I have researched and would recommend:
Mint: Mint is free. You link your credit cards, bank accounts and add your budget that you’ve created. Mint will track how well you keep to budget limits. You can choose categories of spending, set limits, specify how frequently each expense will occur, and specify whether to start each month with leftover amounts from prior month (i.e. if you have irregular income).
YouNeed a Budget (YNAB): I really like this app but it costs money to use it. YNAB costs $11.99 per month or $84 for the annual plan after a free 34 day trial. If you’re not in debt, I think this is a good choice. The free 34 day trial means you can try it out before committing to see if it works for you.
Everydollar: This is a new app created by Dave Ramsey. I like it for the budgeting and tracking components, which are free. But, it falls short when you want to automate your expense tracking by linking your bank and credit cards. While the budgeting and manual input of your expense tracking is free, it costs $129.99 per year to move to the “Plus” version. While I like the visuals he creates for the budget and tracking, I think it’s too expensive for the automation upgrade. So, if you’re only interested in manual tracking and don’t want to integrate your bank and credit card accounts, I think this is a good tool. If you want to automate, Mint is free.
Spreadsheet: If you’re not tech savvy or don’t like computer based programs, the spreadsheet I mentioned above when creating your Master Budgeting worksheet, can also be used to track your expenses.
Plain old notebook: no link here. If you are adverse to an app/computer tracker, you can do it manually. I once had an 80 year old client who preferred to do his tax returns, with paper forms. We always double-checked his work using our computer software, but he was always accurate, down to the penny! So, if you like it the “old-fashioned” way, go for it. But, remember to write everything down.
Balance the Budget Weekly
Once you get everything setup and begin spending money, use your spending tracker app (from one of the above options) to keep track of each purchase and bill. About once a week, review where you actually are with what you planned. Have you spent all of your dining money already and now you will be cooking each night until the end of the month? Did you sell some clothes and have extra cash to put towards a credit card or vacation? Make sure you do this religiously. Its so much easier to keep up with it then it is to catch up!
Review Budget Monthly and Setup Next Month’s Budget
Finally, it’s important to check in with your budget and make adjustments as needed. See how you did each month, where you overspent, and if you had extra left over. Then, adjust your budget according to what you’ve learned and set yourself up for success the following month.
That’s it! If it seems like a lot at first, you’re not alone. Budgeting takes practice, just like everything else in life. Do you have questions about getting a budget started or utilizing one of the spending trackers listed above, please feel free to reach out to me. I’m happy to help!
Getting a college education is one of the American dreams, right? It will help you achieve your career goals and provide you with “financial security”. A college education can be invaluable but first you have to fund your education and most people are doing it by taking on debt in the form of student loans.
Student loan debt in the U.S. has reached $1.6 trillion
That’s insane! The student loan crisis in this country has become way too serious to ignore.
The Disheartening Stats on the Student Loan Crisis
National student loan debt has WAY exceeded credit card debt – by over $1.6 trillion! (1)
There are currently about 44 million loan borrowers in this country. (2)
Students, on average, accumulate about $35,000 in student loan debt by the time they graduate. (3)
As of 2018, roughly 1 out of 10 people with student loans were late (or completely missed) their payments. That’s the highest 90+-day delinquency rate of all household debt – outranking auto loans, credit card debt and mortgages! (4)
Student loan debt has seen almost 157% growth since the Great Recession and is the fastest-growing portion of the total household debt in the U.S. (5)
As you can see, the student loan crisis has reached alarming levels. It is delaying many Americans from investing into their retirement dream and it’s killing the dream of college providing you with financial security. That’s NOT ok.
It’s time to get intentional and take control of our financial future!
How to prepare your kids to go to college without student loans:
I know this is a tough one. As a parent of twins, I want the absolute best for them and I’m sure you do too. But, have you bought into the trap of believing the absolute best means college and not just college, but the best college they can get into, regardless of whether you or they can afford it?
My husband and I began saving for our kids college education when they were babies. We chose a 529 plan and I highly recommend them ONLY IF you can afford to save for your own retirement and have extra to put away into a college savings plan for your kids.
But, the majority of families can’t afford to save extra for their kids college. If you fall into this category, please don’t think the only solution is to get “help” from student loans. Trust me, there are thousands of students who have obtained their degree without going into debt to get it. Here are a few practical steps you can take to help them get ready far in advance.
Sit down and create a budget with your child with their dream career beginning salary and subtract all the expenses they will incur.
Have fun with this. It’s not intended to depress them but to give them a realistic view of how much money they will be bringing in and how much will be going out each month. Do the budget with student loan debt and without so they can see how much “damage” student loan debt can make on their bottom line. Don’t overthink this or get lost in the weeds. Just do a rough estimate of anticipated expenses. Your child will get the idea very quickly as they see how fast the “amazing” salary goes. Click here to show them (and you) how monthly debt payments are calculated. If you need help with creating a budget, Dave Ramsey has very helpful forms for you to utilize. You can access them here.
Talk to your child about their career goals. Not all degrees are created equal (sorry but it’s the truth).
Do they want to go to college? What do they want to do? What you study matters! A student’s major can actually have a bigger impact on lifetime earnings than simply going to college, according to Georgetown University for Education and the Workforce.
Note that the lowest-paying majors are in education, arts, and social work fields.
You may think we’re horrible parents, but we told our daughter,who at the time thought she might want to major in social work, that she would be going to a local in-state public school if that was the choice she wanted to make. We had no problems with her choice in major and actually thought it was very philanthropic and caring to choose that career path; BUT, social workers don’t make a lot of money. And, let’s face it, they’re not going to be picky on where our child got their degree from. They just want someone skilled and willing to do the job.
Find an AFFORDABLE College!
Now that you’ve sat down with your child and reviewed their goals and created a budget, it’s time to research potential schools. Public in-state schools are your best bet for affordability. If they live at home, that saves more money. I know we all dream of our kids going to an Ivy League university (me too), but I truly believe it’s more about work ethic and what you do with your degree AFTER you graduate than what the name on the piece of paper reads. When you go to a doctor, do you find them by searching on a listing of where they went to college, or from word of mouth from others on how good they are. I can tell you that I’ve never asked a doctor where they went to school before getting a checkup. Ok, maybe one time when my son had to have a heart procedure I may have glanced at the diplomas on his wall. But, the fact that he was head of the pediatric cardiology dept. was what really sold me – what did he do with his degree? He worked hard and moved his way on up to the top.
What you do with your degree matters more than the name of the college on the diploma.
Financial Jackson
Encourage your kids to work hard. Hard work pays off.
I can’t emphasize this enough. Work hard and don’t give up. You, as parents, set the example here. Enough said.
Help your kids find scholarships.
Scholarships are a key part of graduating debt-free, and there are hundreds of them available to students and lots of them aren’t academic focused. For help in this area, I encourage you to look on Anthony Oneal’s website. In fact, he has a new book out called “Debt Free Degree“. I highly recommend it. Anthony has a passion for helping people avoid college loan debt.
But what if it’s you that has student loan debt?
So, you didn’t get this advice in time and you are now faced with student loan debt. What can you do? Dave Ramsey is a knowledgeable resource for all things financial. He started on a radio station back in 1992, sharing practical answers for life’s tough money questions. Today, his show reaches 15 million+ weekly listeners. His techniques to help people get out and stay out of debt is proven successful and I can only hope I can help him in his revolution! Click here to read how you can pay off student loans quickly. Don’t wait!! Click here now! Get started paying off your student debt burden TODAY! Let’s go! You can do this!
Monthly student loan payments usually range between 5-15% of graduate’s income after they enter the workforce. (1) Ouch.
The amount of the monthly payment varies based on the amount borrowed and the interest rate. Average interest rate really depends on the type of loan and the first disbursement date of the loan (the date the borrower can start getting the loan money). Interest rates range from 5.05-7.06%. (2)
For example, if a student borrowed $45,000 over their 4 years with a 6% interest rate, they’d have to make 10 years of monthly payments at $500 per month. The recommended annual salary for making “manageable” payments at that rate is roughly $75,000. (3)
So what happens if those payments didn’t exist?? What could that money do to work for you and towards your dreams of financial security? The typical loan payment is between $200 and $300 per month. If a 21 year old graduate started investing $250 per month with a 10% return instead of putting that money toward a payment, they’d have $2,612,924 by the time they retire at age 67!
According to the Federal Reserve, Americans owe a record $1.04 trillion in credit card debt – up from less than $854 billion five years ago
Is it a good idea to have a credit card? My short answer is NO!
I have 18 year old twins who just graduated from high school and they asked me if it was time for them to get a credit card because the teller at our bank told them it was time. What?! It’s no wonder that Americans owe an average of $6,354 on bank issued credit cards. Teenagers and credit cards are a horrible idea. In fact, for most adults credit cards are a horrible idea.
I’m sure all of you are thinking, “but what about building my credit score and how about all of the benefits I can get from credit card points or ‘free’ miles?”
Read on and I’ll attempt to explain..
Why are credit cards a bad idea for most people?
According to a study released by the Boston Fed, only 35% of credit card users pay off their bill in full every month. That means 65% of people don’t pay their credit cards off every month. If you are one of the few people who do pay it off each month, you’re obviously in control of the plastic (but read on to hear my thoughts on credit cards even if you pay them off each month). For the 65% of people who do not pay off their credit card balance each month, let’s do some simple math.
Have you read my blog post on the power of compounding interest? If not, click here. Compounding interest is, at it’s simplest form, interest earned on interest. This same concept is used against you when it comes to credit card debt and what’s worse – credit card companies charge way more interest than you are ever going to earn in your savings account.
According to the federal reserve, the average interest rate charged on credit cards in 2018 was 15.32%APR. (1)
valuepenguin.com
Most credit cards come with an interest rate. Simply put, this is the price you’ll pay for borrowing money. Interest is like rent: the longer you pay interest, the more interest you pay – and at the very end, you get nothing back.
For credit cards, interest is typically expressed as a yearly rate known as annual percentage rate or APR. Though APR is expressed as an annual rate, credit card companies use it to calculate the interest charged during your monthly statement period.
How to calculate APR:
Here’s the math in case you’re interested. If not, scroll down to my thoughts on whether a credit card is needed to build credit.
The average interest rate charged on credits cards is roughly 15%. To calculate how much interest you’ll be charged, you’ll need to know your average daily balance, the number of days in your billing cycle and your APR.
Let’s say you have a travel rewards credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle. You also have a variable purchase APR of 15.99 percent.
Here’s how to calculate your interest charge (numbers are approximate):
Divide your APR by the number of days in the year. 0.1599 / 365 = a 0.00044 daily periodic rate
Multiply the daily periodic rate by your average daily balance. 0.00044 x $1,500 = $0.66
Multiply this number by the number of days (30) in your billing cycle. $0.66 x 30 = $19.80 interest charged for this billing cycle
Just like compound interest on savings, this interest gets added to what you owe each billing period (generally each month).
The math requires some work but the concept is simple: Carry a balance, and you’ll pay interest.
The cost of paying of debt with minimum payments:
And beware of only paying the minimum balance! The minimum balance is typically calculated at 2% of your balance. A credit card balance of $5,000 with a 14% APR, will take you 22 years and $5,887 in finance charges if you only pay the minimum payment. You are literally paying double the original amount borrowed. Yikes. Great business for the credit card company; financially crippling for the borrower.
Should you have a credit card to build credit?
The whole premise of “building credit” is based off of the idea that if you take on debt now, you can prove to the lender that you can take on more debt later. A high credit score isn’t an indicator that you are wealthy and ca really afford whatever it is that you’re applying for – credit card, car loan, mortgage, etc. A high credit score is generally an indicator that you love debt. Bankers (like the ones that approached my kids to say they needed their credit card), car dealers, and unknowledgeable lenders have told Americans for years to “build your credit” now to buy things later. They’re telling you to get debt so you can get more debt because debt is how you get stuff. It’s really a crazy logic when you think about it!
Bottom Line:
IF you are one of the 35% of Americans that payoff your credit card each month, a credit card can be utilized to obtain some “perks” but BEWARE of the lure to spend $1000 to get $20 worth of airline credit! And, read the fine print of any credit card you are thinking about getting. Click here to read about how credit cards work and what to look for when researching the best one for you.
For the rest of the 65% of you that do not pay off your credit cards each month, I strongly discourage getting a credit card and for those that already have credit card debt, a plan to pay them off and then to cancel them! A debit card can be used for traveling and for making online purchases. The key is to save up for things before you buy them. For steps on how to payoff your credit card debt, click here. If you want to know how to cancel your credit card, click here.
