In the journey to becoming debt free the development of a budget is vital and must be strategic. Here are some simple steps in helping to create a budget:
Step 1. On a piece of paper or a spreadsheet list all debts owed (credit cards and any other loans) from the smallest balance due to the largest balance until you are finished. For this method, the interest rate does not matter. At the end there will be an explanation about this.
Step 2. Pay the minimum amount due on all of the debts except for the first (and smallest) debt on the list.
Step 3. Take the excess money from the budget and add it to the minimum amount due on the first and smallest debt owed. Many credit card balances are only a couple of hundred dollars and, with this method, can be easily paid off within a month or two.
Step 4. Once the first and smallest debt is paid off completely, take the amount used for that bill and add it to the second debt on the list. This method is called debt snowball. The idea is for money used to pay smaller debts will continue to be used towards paying off debt until all debt is paid. This will help debt to dwindle away faster and in a reasonable amount of time.
Step 5. Continue the debt snowball procedure until all loans (except for the house) are paid in full.
Although it might hurt now and many sacrifices might be made, there will be less pain in the future in becoming free of the worries and burdens of the obligations that are owed. This method of budgeting helps to attach debt through steady planning. It may seem slow and tedious, but it is imperative that complete focus and motivation must be kept until the last check is mailed.
Most financial advisers feel that the highest interest loan should be paid first, but human nature needs to see short-term gains in order to continue in the process. There is a great sense of accomplishment when the first loan is paid off completely. That small victory will help to complete the process of becoming completely debt free by giving a renewed sense of purpose.
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Dave Ramsey’s research shows that it takes about 2.5 years for the average consumer to get out of debt completely if they are following a strict budget and payment plan. Since everyone’s finances are different, some will become debt free faster than others, but the most important thing is that there is a beginning.
