Debt drains our finances of its strength.  You need to pay off your debt so you can keep your money and start accumulating wealth.  The best way to achieve this is by following a well laid out plan.  The good news is that a plan has already been developed for you.  All you have to do is implement the debt snowball method to become debt-free.

I know the debt snowball works because I have used it myself.  It is easy and very effective, but you have to follow the plan precisely if you want to get the best results.  It has been refined by many people over the years and over time it has become a well-oiled machine for eliminating debt.

Prerequisites to the debt snowball

In order to successfully use the debt snowball, there are some things you should have already done.  They are:

1.  Decide to become debt-free

This may seem obvious, but the more firm you are in your decision to get out of debt, the more likely you will be to succeed.  You need to attack your debt with intensity.  You have to get fighting mad about past financial mistakes.  The debt snowball works best if you focus with single-minded determination on it, especially at first.

2.  Create a starter emergency fund

Paying off debt has a lot to do with momentum.  You want to do whatever you can to preserve your momentum once you get started in the right direction.  However, life happens and it often costs money.  Therefore, you want to have some cash put back to pay for these types of emergencies.  This will lessen the likelihood that your debt snowball gets interrupted leading you to discouragement.

3.  Create a personal finance budget

A budget is a necessary tool to track your spending.  It helps you know exactly where your money is going.  This gives you the ability to direct your money for the purpose you desire which right now is paying off debt.  The sooner you get a good budget in place, the better progress you will make with your debt snowball.

4.  Frugal up your finances to create margin

You need to reduce your monthly spending below what you earn so you have extra money to apply to paying off your debt.  For a period of time, you need to become the most frugal person you know.  The sacrifice is worth it and this is just a season.  Once you become debt-free, then you can lighten up a little.

You can click on any of the links above to get more information for completing each of these prerequisites.  Once you’ve done the four things above, then you are ready to really apply yourself to paying off your debt.

How to implement the debt snowball to pay off debt

The debt snowball technique that I detail below was popularized by Dave Ramsey.  This is the plan that I followed to get out of debt so, I know it works.  It has also helped thousands of others to do the same.  Here are the steps to implementing the debt snowball:

1.  List your debts from smallest to largest excluding your mortgage from the list.

2.  Make minimum payments on all but the smallest debt.

3.  Pay the maximum amount you can on the smallest debt.  Don’t worry about the interest rate or other terms.  Simply pay the most you can towards the one with the smallest balance.

4.  Once the smallest debt is paid off, take the total amount you were paying towards it and apply this amount to the next debt on your list.  Keep doing this until all your debt is paid off.

A short debt snowball example

Let’s say that you owe three debts as shown below listed from smallest to largest:

After creating your budget and frugaling up your finances, you created $200 in margin between what you earn and what you spend.

You would start out your debt snowball by applying the $200 toward the credit card.  So, your total monthly payment to the credit card bill would be $230.  This means that you would pay off your credit card in just over two months!

Once the first debt on your list is paid off, then you take the total payment amount and apply it to your next debt.  In this case, you would take the $230 you were paying toward the department store credit card, add it to the $100.00 minimum payment on your student loan and start paying $330.00 toward its balance.  As you can see, your money snowballs from one debt to the next accumulating a bigger payment as you go.

By the time you get to your car loan, you will be making a total payment of $630.00 which is just over double the minimum!  This will pay it off fast because the extra you send in each month goes directly toward the principal.

The debt snowball is a technique that works!

As you can see from the example above, this technique is very powerful at paying off debt fast, yet it is simple enough that anyone can do it.

One last word, it is possible to get out of debt.  No matter how much debt you have accumulated, no matter how bleak the situation may seem, it is not impossible.  You have to believe this.  If you totally commit yourself to the debt snowball and work it like a maniac, you will see results.

I highly recommend creating a very simple chart that you post on your refrigerator or another conspicuous place to remind you of your progress toward becoming debt-free.  This process is likely to take some time, but most people pay off all their debt in 18 to 24 months regardless of how much they owed.

The chart will help remind you that what you are pursuing is 100% possible.  As long as you believe and continue working your snowball, you will succeed!

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Excuses for not having an emergency fund.

It seems that most of us agree that an emergency fund is a great idea.  If so, then why do so few of us actually have any savings set back?  Let’s explore a few of the excuses that exist:

1.  I never thought of establishing an emergency fund.

It may have never crossed your mind before.  As logical as it is, many of us probably didn’t grow up in a home that had an emergency fund, so it just never occurred to us that we needed one.  I know this was the case for me.  My parents relied on credit cards as their emergency fund.  Again, this is a fast way to run up debt which is not a good idea.

This excuse is officially null and void for you.  You have now been notified that you need an emergency fund.  We’ll talk more about the specifics in a minute.

2.  I don’t have the money for an emergency fund.

I’m sure that this is a very prevalent excuse for not establishing an emergency fund.  Of course, the problem is that life doesn’t stop happening just because you don’t have the money.  In fact, when you don’t have the money is exactly when life happens.  It is when it is the least convenient that the kids get sick, the car needs repairs, the water heater goes out, and it all happens at the same time! 

You can’t afford not to have an emergency fund.  I suggest looking for ways to legitimately raise your income in order to save enough money for at least a starter emergency fund as soon as possible.  You need this to stop the money from running out the hole in the bottom of your bucket!

3.  I use my credit card in case of emergency.

Again, this goes against the idea of getting back to the basics of financial wisdom.  Earlier I wrote about the pitfalls of debt and why becoming debt-free is the best path to financial success.  Some would argue that using a credit card in this manner is okay as long as you pay off the balance every month.  Well, that’s a great plan, but the situation we are discussing is one where a personal emergency has occurred.  Let’s assume this emergency keeps you from working full-time for an extended period.  You may not be able to pay off your credit card at the end of the month.  Without an emergency fund, you leave yourself vulnerable.

Using credit in any form as an emergency fund is a bad idea.  It will often make a bad situation even worse by creating a financial emergency to go along with whatever else has happened.

The specifics on establishing an emergency fund.

Okay, let’s get down to it.  What are the specifics you need to know in order to set up your own emergency fund?  Well, it is pretty simple really, but let’s go over the details just so no one gets confused.

1.  Save $1,000 cash for a starter emergency fund.

You should create a baby, starter emergency fund as the very first step in getting back to the basics with your money.  Some say that you need more than $1,000 as your starter emergency fund.  This is a personal decision.  I think $1k is a minimum.  It is an amount that most people can scrape together pretty quickly if they really set their minds to it.  Do what makes you feel comfortable, but do it now!

2.  Keep your starter emergency fund in a local savings account.

I am a firm believer that you should keep at least $1k in a local savings account that is easily and quickly accessible to you.  Don’t invest it or put it in an account where you can’t immediately withdraw the funds.  The whole idea is that this is cash you can use in an emergency.  Investing comes later.

3.  Only use your emergency fund for real emergencies.

Dave Ramsey often quips, “Why are so many people surprised that Christmas comes in December this year?”  Buying Christmas presents is not a reason to dip into your emergency fund.  You should only use this money in a real emergency.  It should only be used when unexpected, unbudgeted expenses occur.  You should budget for likely expenses.  The emergency fund is your backstop just in case.

4.  Create a fully funded emergency fund when debt-free.

Once you pay off all your debt except your mortgage, then you should add to your emergency fund.  The goal is to accumulate 3 to 6 months living expenses.  This way if you lose your job or get hurt and can’t work, you can survive financially.  Your emergency fund becomes your financial safety net.  At this point, you may want to put some of your emergency fund in a money market account.  I still like to keep $1,500 in a local savings account, but I put the rest in an account that yields a little more interest.

Establishing an emergency fund will minimize crises.

Once you have an emergency fund, you will be able to breathe a sigh of relief.  It will help you to rest a little easier because you will know that you can handle what comes up.  This is a much better way to live!  I challenge you to try this first step in getting back to the basics with your finances.  I think you’ll agree that it is a wise move that will bring you some beginning peace with money.

What are your thoughts on establishing an emergency fund?  Did I leave anything out?  Leave a comment below and let me know!

Photo by SqueakyMarmot

A lot of people that are truly successful with money live a debt-free lifestyle.  If they do borrow money, they pay off the debt early to lower risk and avoid paying interest.  In order to become more financially successful, let’s set a goal to become debt-free.

This may seem like a very audacious goal, but it is achievable and in probably less time than you think.  I know because my wife and I paid off all our debt except our mortgage earlier this year.  So, I can personally testify that this is possible for the average person to become debt-free.

The advantages of debt-free living.

There are numerous advantages to living a debt-free lifestyle.  Before you commit yourself to any goal, it is important that you understand why it is necessary.  Therefore, I want to highlight a few reasons that you should firmly decide right now to pay off all your debt.

1.  Being debt-free lowers financial stress.

Do you feel nervous about your financial position?  Do you start sweating profusely or have to down antacids by the handful every month when the bills arrive?  If so, then you are a prime candidate for considering a debt-free lifestyle.  Is it all really worth it?  Wouldn’t it be better to hunker down, pay off your debt, and eliminate the source of your stress?  Why live this way?

I can tell you that living without debt is a lot better way to live.  It ends the emotional roller coaster which alone significantly increases one’s quality of life.

2.  Being debt-free lowers your financial risk.

Debt is risky because you commit to paying it back on time or agree to suffer some prearranged consequences.  The consequences may include things like paying penalties, incurring higher interest rates, and/or forfeiting your collateral.  If you pay cash up front for purchases, you totally eliminate this financial risk.

With debt you have a greater potential downside if you lose your job, suffer a personal disaster, or encounter a serious health issue.  Why take the risk?

3.  Being debt-free opens up your options.

Debt is a trap that limits your choices.  You are tied to paying it off one way or another.  It becomes a ball and chain that robs you of your freedom.  Once you have a pile of debt, then you have to keep your nose to the grind stone because you lack financial margin.  One little trip up and your whole house of cards is going to come tumbling down.  It doesn’t have to be this way.

Becoming debt-free gives you back control of your life.  It gets the creditors off your back and allows you to make the decisions again.

Debt myths revealed and lies exposed.

There are numerous falsehoods that exist and are perpetrated by institutions that make a profit by charging consumers interest on loans.  It is important that we first recognize and debunk these myths before we can embrace a debt-free lifestyle.

1.  Debt is not the path to a better life.

Banks and financial institutions have done a fantastic job of selling us on the idea that credit cards, home equity lines of credit and car loans give us financial power.  This is simply not true.  What this debt does is line their pockets with profits.  We’ve all enjoyed the “priceless” MasterCard commercials, but it is time to realize that true financial freedom comes from being debt-free not charging items we cannot afford!

Do you want to continue taking financial advice from people that need the government to bailout their businesses because they’re broke?  Not me!

2.  Debt is not a tool.

Okay, debt is a tool.  It is a tool to make bankers rich, but it is not a tool to make you rich (unless you are a banker)!  I think the financial industry has recently proven that you cannot borrow money from one place, invest it in another and make it work for the long-term.  It is just too risky.  This will get you in a bind and fast. 

Just take a look at all the people that took out adjustable-rate or balloon mortgages.  They borrowed money, invested it in a house they couldn’t afford and bet that they could refinance it before the day of reckoning.  It was a gamble and they lost.  This is not the way to win with money.

3.  Debt is not inevitable.

Many of us were raised to believe that the way to get what you want was by using debt.  We saw our parents buy things on credit cards and other consumer loans.  We grew up thinking that a car payment was just a way of life.  We were trained for instant gratification.  When you want something, just whip out the plastic and get it.  Of course, this has caught up with many of us over the years. 

It is time to realize that debt is not inevitable.  It is possible to live without it.  We can do what our grandparents or great grandparents did.  We can wait until we have the money before we buy things.  I know it is a radical idea, but one whose time has come.

4.  Debt-free does not mean fun-free.

I think that some people believe that the only way to enjoy life is by living beyond their means.  Have you ever listened to Dave Ramsey’s radio show?  Do the people that call in seeking his advice because they are drowning in debt sound like they are having fun?  No!  It is just the opposite.  I never get enough of hearing the calls where people are calling in to celebrate their freedom from debt!  You can hear the joy and relief in their voices. 

Becoming debt-free opens up your life to happiness and prosperity like you’ve never experienced!  When was the last time that you were debt-free?  Were you happier then?

Get on the right path to financial freedom!

Nugget of financial wisdom: True financial freedom begins when you become debt-free and start living within your means.

You really need to grasp the truth above if you want to win with money.  Over the next several days, I will lead you through the steps to achieving financial freedom from debt.  However, unless you embrace the ideas I have written about here as the absolute truth, then it is very unlikely that you will succeed with money.  Ninety percent of what determines your financial success lies in your attitude toward money.  Once you acknowledge this basic financial principle, then you are well on your way to financial freedom!

What are your thoughts about debt and becoming debt-free?  I’d love to hear from you.  Please leave a comment below with your opinion.

Photo by danesparza

“Many a man thinks he is buying pleasure, when he is really selling himself to it.”
~Benjamin Franklin

Why do I constantly want stuff that I don’t need?  It seems that there are certain items that I am continually attracted to buy even though I probably wouldn’t use them if I bought them.  Why does this happen?  What makes certain items so alluring? 

It seems to be the same things that keep popping into my head over and over.  I convince myself that it would be a waste of money and then a few weeks later, I’m looking at the same thing again! 

Do you ever struggle with this sort of impulse to purchase things you don’t need?  If so, how do you deal with it?

I struggle to keep from buying an iPod or MacBook.

I don’t know what it is about Apple products right now, but they seem almost impossible to avoid buying.  I constantly keep coming back to the idea of purchasing an iPod or MacBook.  They are both cool, but I certainly don’t need either one.  I guess it is the popularity of these products that keeps pulling me back. 

Marketers do a fantastic job these days of selling us an image.  It is just cool to own Apple products.  After all, who would you rather be?  The geeky Windows guy in the commercials or the cool, laid back Mac guy? 

Most recently, I’ve been looking at the iPod Touch.  It is a sweet device.  I’ll admit that I am especially susceptible to buying gadgets.  However, when I stop and really think about it, I know I would get a Touch, play with it until the newness wore off, and then it would sit idle on a shelf most of the time.  I don’t listen to that much music and why watch a video on such a small screen when I can just watch it at home?  If I traveled a lot, then I could see where something like the Touch would be valuable.

Why worry about buying things?

Isn’t buying things we want a privilege we earn from working?  Many people use this reasoning or something similar to justify buying whatever they want.  They usually charge these items on credit cards.  This is how they sell themselves to their pleasures as Ben Franklin states in his quote above.  They get in debt and then instead of being able to enjoy what they bought, they become slaves to the lenders.  They have to work harder and longer to support their artificial lifestyle. 

Purchases of a few hundred dollars add up quickly to thousands of dollars.  On top of that, if you carry a balance on your credit card, you will pay on average 12-14% interest.  These rates can skyrocket quickly if you are late on even one payment.  In addition, you may become subject to late fees and penalties.  All this to get something that isn’t even used or enjoyed.  No thank you!

How to avoid buying things you don’t need.

I had a recent flare-up of the wants lately so, in order to help myself deal with this, I’ve researched some ways to overcome buying things I don’t need.  Here’s the very best suggestions that I found:

1.  Make yourself accountable to someone that’s frugal.

If you often buy things you don’t need, then get an accountability partner that is naturally more frugal than you are.  Tell someone in your life like a spouse, sibling, or close friend that you are trying to curtail your spending and you need their help.  Ask them to talk you out of items you don’t need.  Just knowing that you are going to have to answer to someone for buying the latest gadget will help you to stop and think twice about it.  My wife often helps me in this area.

2.  Don’t go shopping.

This one may seem obvious, but boredom often gets the better of us.  Here’s how it goes.  We have some free time with nothing to do and before you know it we are out at the mall or surfing the online stores.  Either way this is dangerous!  I often disguise this as research.  I’m just checking into the features of the latest gadget.  I most recently got sucked into wanting the iPod Touch by participating in a survey that promised to give three of them away.  I started looking at the Touch to see if it was worth the time it would take to complete the survey.  Of course, this was just fuel for the fire.

3.  Cut up your credit cards and use cash.

I know this is radical, but it works.  For some reason, it is just mentally easier to charge things on a credit card.  When you have to count out cold, hard cash to make a purchase it makes you stop and think.  At least, this is my experience.  It is a lot harder for me to let go of my money when I’m holding it in my hand.  I think that credit card balances are abstract, but cash in hand is very real.  If you can’t go as far as cutting up your credit card, then give it to your accountability partner or at least stow it away at home.  This will help you avoid those impulse buys.

4.  Feed your mind vitamins of frugality.

Our minds operate a lot like a computer.  Garbage in, garbage out.  Therefore, if you are trying to avoid buying things you don’t need, you should find as many good inputs as possible that feed your mind the right ways of thinking.  I do this by following good personal finance blogs, listening to Dave Ramsey, and reading great books that stress simple and frugal living.  I think of these things as vitamins for my mind.  They strengthen my resolve to hold on to my money.

5.  Decide in advance how you are going to use your money.

A budget, done correctly, helps you decide in advance every month exactly how you want to spend and invest your money.  You give every dollar a name and tell it precisely what you want it to do for you at the beginning of the month.  Once you have a spending plan or budget in place, then it is easier to avoid buying things you don’t need.  It is often because we don’t have a plan for our money that we spend it on impulse.

6.  Be careful about who you hang out with.

We are strongly influenced by the people around us.  Who are you usually with when you make frivolous purchases?  You may want to avoid this person for awhile until you get your financial footing.  If you do have to be around people that you feel are a bad influence, then try to arrange it so that you are doing something other than going to the mall or shopping.  Go to the park or plan an outdoor adventure instead of going somewhere where you’ll feel tempted.

7.  Always sleep on it before making a purchase.

Give yourself a financial timeout.  You can always wait until tomorrow before making a purchase.  In the meantime, talk to your accountability partner about the purchase, feed your mind some frugality vitamins, and review your budget.  If you still feel the purchase is a good one and you have the cash to buy what you want, then go for it!

Get control of yourself and start winning with money!

Take it from a recovering over-spender, it is possible to stop buying things you don’t need.  It just takes some forethought and planning.  The suggestions above are what work best for me.  By implementing these things in my life, I have been able to pay off all my debt except for my mortgage and I’ve started saving to pay cash for a newer car.  I am living-proof that it is possible for someone to turn their life around and start winning with money.

What works for you?  Please leave a comment below and let me know.

Photo by TheAlieness

If you want to get serious about improving your financial position there is no better time to start than today. You might think that you are in too deep of a hole to ever get yourself out, but you might be amazed at how quickly you can make positive traction. I am 100% convinced that debt-free is the only way to live successfully. The Bible says that the borrower is slave to the lender (Proverbs 22:7) and I believe it. When you owe someone, you work for them. Your options are limited because you have to continue to make those payments. Debt is the biggest obstacle you have to becoming truly wealthy.

So, how does one change their ways and start fresh? I recommend you start by reading Dave Ramsey’s book, “The Total Money Makeover”. It lays out a simple plan to get you from where you are today to becoming financially independent. It is a complete map of what you need to do. It is not a get-rich-quick scheme. It is real and practical. I have been following his advice for the last year and it is truly paying off. Most people are able to pay off all their debts except the house in 18 to 24 months. I didn’t see how this was possible when we started, but here we are about 18 months later and we will be debt-free next month!

You might also want to check out Dave Ramsey’s Website and Debt-Proof Living. The key is to get started. We all know that getting started is half the battle. You simply have to decide that this is what you want and then GO FOR IT!