Today was a great day. You were productive, spent time with your family, and went to bed on time. You close your eyes ready for tomorrow, only to find yourself awake 4 hours later… This is the time that your brain ruminates your revolving debt as you desperately try to get some rest.
If your financial situation doesn’t change, you know you won’t be able to retire with enough money. You then start to wonder if you’d ever be debt free.
Being in debt is one of the worst places you can be, but you’re not alone.
I and thousands of others have been there. Those who were lucky managed to pay off their entire balances.
You can too. But, you need to take action fast.
The good news is that there are clever ways to be debt free — the debt snowball method. It’s not easy, but if you’re ready for change–here’s how you can get your financial future back in order:
Table of Contents
Kickstarting to Get out of Debt
First and foremost, you need to get yourself mentally prepared to before you start your debt-free plan.
1. Commit for a Worthy Cause
There are stories of people having a “magical moment” when they’d decided to become debt free.
The reality is that you don’t need this magical moment. What you need is commitment.
Instead of telling yourself that you want to be debt free, find a reason worth fighting for. Think of what having zero debt would bring to your life.
Would you be able to travel more? Would you be able to sleep better at night?
Despite most Americans carrying some type of debt, having debt isn’t normal. You’ll put yourself in the never-ending “rat race”–living an unfulfilled life. One where you’ll be dependent on a job you hate to sustain a lifestyle you can’t afford.
By having a clear purpose, you’ll focus on reaching your goal despite the obstacles that come your way.
I’d hit rock bottom when I realized that I was living paycheck-to-paycheck. It was at this moment that I became determined to pay off $6,000 of credit card debt. Because I had a purpose I was able to make an extra $500 principle payment each month–paying off my entire balance off in 18 months.
The same can happen to you, but find a reason worth chasing.
2. Create Your Financial Blueprint
Even after committing, you can still fail at paying down debt.
Because once you do pay it off, you’d be likely to go back into debt if there’s no direction. It’s easy to stay motivated when you’re first starting off. But, when the going gets tough, it’s here where you’ll need something to keep you motivated.
So how do you stay motivated?
Write down your financial goals. For example, if you want to pay down $3,000 of credit card debt, set a due date.
Bad goal: I want to pay off all my credit card debt
Good goal: I want to pay off my $5,000 credit card balance in 18 months
The second goal is better than the first because you can break it down. You’d need to pay $278 each month to pay off your entire $5,000 balance.
But, you don’t break down a specific goal and forget about it. You need to check on it daily to be sure that you’re on track. A great tool to help you do this is a journal.
After setting your specific goal, break it down into daily tasks. This could mean bringing your lunch to work so that you have extra money to pay down your debt. Then at the end of each day, check to see if you’ve hit your daily target.
Learning the Debt Snowball Method
Committing to becoming debt free is great, but you need a plan. The debt snowball method is a great place to start.
This strategy boils down to paying your smallest balance first, disregarding interest rate. This is an effective approach because you’ll get momentum going.
For example, if you had $1,000 of debt to pay off: credit card 1: $300 credit card 2: $500 credit card 3: $200
You’d make the smallest payment to credit cards 1 & 2. Then pay as much as possible to pay off credit card 3. In this scenario, it can be tempting to pay the highest balance first.
The problem with paying off your highest balance first is that it’ll take longer. This will increase your odds at giving up because it’ll feel like you’re making no progress at times.
By paying the smallest balance first you’ll get a quick win and stay committed.
So how to use the snowball method?
List all your debts on a spreadsheet. Then figure out how cash you’ll have available at the end of each month using Personal Capital. Get your total expenses and subtract this amount from your monthly income.
Use as much of this extra money as possible to pay down your debt.
Unless you have a large debt, don’t worry about accruing interest in your other balances. Pay down your smallest debt, then work towards the next smallest.
More important, stop using your credit cards and don’t make unnecessary purchases. Doing this will only prolong the time it’ll take for you to pay down all your debt.
Should You Use the Snowball Method?
Many debates whether the snowball method is the best way to pay off debt.
The answers is–it depends.
Whatever will help you be debt free is the right choice for you. Using the snowball method carries a cost. Since this method doesn’t take into account interest rates, you may end up paying more in the long run.
First, calculate how much interest you’d pay to make the smallest payment. If you don’t carry large balances, then it won’t matter how you pay off your debt.
Another important factor to consider is what will help you be consistent. For example, if you’re someone who needs to get motivation, pay down your smallest debt first. But, if you’re one who likes to be efficient, pay your highest interest credit card first.
There’s no right way to do this since everyone is different. Paying interest is never a good idea, but if this means that you’d be debt free, go for it.
Exponentially Eliminate Debt Using an Extra Income
An issue that most people face when paying down debt is the rate at which they do so.
The only way to change this rate is by decreasing your expenses or increasing your income. The problem with decreasing your expenses is that you can only do it to a certain point. But, increasing your income is limitless.
Still cut your expenses as much as possible using tools like Trimm and BillCutterz. Once you do you’re ready to increase your income. Starting a side-hustle is the best way to do this.
Great side-hustles to start are:
- Freelance writing
- Affiliate marketing
- Start a blog
None of these side-hustles are easy to create. But, once you earn income from a side-hustle your finances will improve.
Whether you love your job or not, having a side-hustle is a great way to pay down your debt faster. You’ll also feel confident knowing that you’re not dependent one income.
Bonus Strategies to Crush Debt
The debt snowball method is only one of the many ways you can pay down your debt.
If you carry a large amount of debt, then you need to explore your other options. Other options include consolidating your debt for a lower interest rate. For example, if you carry balances on many credit cards, you can combine your debt into one single balance.
Be sure to review your financial goals before making this decision. Credit card companies will offer a 12 to 18 zero interest promotion. Afterward, the interest rate will spike. This can do more harm than good if you’re still carrying a large balance after the promotion is over.
Like balance transfers for your credit cards, you can apply for a personal loan. Here you’d combine other types of debt you carry into one single loan. This helps you save money on interest and makes your monthly payments easier to make. Crunch your numbers to be sure that you’d be saving money.
“The best time to plant a tree ”is or was“ was twenty years ago. The second best time is today.” – anonymous
Imagine going to bed and not worrying about money. You’d have zero debt and better money habits. You’d sleep and feel happier.
Wouldn’t you want this to be your reality?
The truth is that such a reality can be yours, but you have to be willing to pay the price. It will take hard work and sacrifice to pay down all your debt. And, despite being on track setbacks are inevitable.
You already know about a few debt strategies you can use to crush your debt. But, you first need to commit. Then, set clear financial goals and take action.
Social pressure and other factors led you to accumulate a lot of debt. Although you’re not where you’d like to be today, you can still change your financial future for the better.
Life is too short to let financial setbacks stop you from being happy. Now go crush your debt. A happier life, one with better sleep awaits.
More Resources About Financial Management
Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?
In this article, we will explore ways to set financial goals and actually meet them with ease.
Table of Contents
4 Steps to Setting Financial Goals
Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.
1. Be Clear About the Objectives
Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.
It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.
Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.
2. Keep Goals Realistic
It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.
It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.
3. Account for Inflation
Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.
Therefore, account for inflation whenever you are putting a monetary value to a financial objective that is far into the future.
For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.
4. Short Term Vs Long Term
As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.
By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.
How to Achieve Your Financial Goals
Whenever we talk about chasing any financial goal, it is usually a two-step process:
- Ensuring healthy savings
- Making smart investments
You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.
Ensuring Healthy Savings
Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.
This is the focal point from where you start your journey of achieving financial goals.
1. Track Expenses
The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.
Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.
If you’re not sure where to start when tracking expenses, this article may be able to help.
2. Pay Yourself First
Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!
Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.
The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.
Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.
3. Make a Plan and Vow to Stick With It
Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized
Nowadays, several money management apps can help you do this automatically.
At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.
Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.
You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.
4. Make Savings a Habit and Not a Goal
In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.
Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:
- Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
- If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
- If you go shopping, always look out for coupons and see where can you get the best deal.
The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.
5. Talk About It
Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.
Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.
6. Maintain a Journal
For some people, writing helps a great deal in making sure that they achieve what they plan.
If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.
When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.
Making Smart Investments
Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.
1. Consult a Financial Advisor
Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.
Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.
2. Choose Your Investment Instrument Wisely
Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.
Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference.
As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.
3. Compounding Is the Eighth Wonder
Einstein once remarked about compounding:
“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”
Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.
Start saving early so that time is on your side to help you bear the fruits of compounding.
4. Measure, Measure, Measure
All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.
If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.
Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!
The Bottom Line
Managing your extra money to achieve your short and long-term financial goals
and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.