Best Way to Pay Off Your Debts - FAST!

No matter how much debt you have, you can make this method work for you. I have LOVED living our life debt free, and this is exactly what we did to get there. It's called the debt snowball method.

Before you can do this, you need to make sure you have a budget in place. You need to know how much "extra" money available each month to pay down your debts. Your "extra" money is made up of your take home pay, minus any of the necessary expenses you have each month - shelter, food, transportation, clothing. After you have your $1,000 emergency fund saved, all this extra money is going to go towards your debts.

The whole idea of this method is to pay off the smallest debts first. By doing so, you gain momentum and motivation to keep going. The payments on your smallest debts get added to larger debts once you pay them off. The small "snowball" you once started with slowly turns into an avalanche, and you'll be debt free before you know it!

To start off, make a list of all of your debts (excluding your mortgage). Car loans, credit cards, school loans, whatever it may be. Make sure you list EVERY debt separately - each separate credit card and loan is listed on its own. Be sure to list the total amount owed and minimum payment owed on each debt, and sort the list from smallest to largest, based on the total amount owed.

Total up the minimum payments owed on all your debts. Ideally, you'll have more than enough "extra" money in your budget to cover all these amounts. (NOTE: If you make enough each month to cover all your minimum payments, you'll need to use a slightly different method to pay off your debts. I'll cover this method in a later blog post. If you want to know sooner, let me know! I'd love to help!)

Take the total of all the "extra" money in your budget, and subtract the sum of the minimum payments on your debts. The difference will ALL be thrown at your smallest debt. Once your smallest debt is paid off, ALL the money you paid on that debt will be ADDED to what you're already paying on your second smallest debt. Once that one is paid off, the pattern continues. Eventually, you'll find that all that "extra" money will be one big payment towards your final debt - a snowball that builds and builds, and eventually forms an avalanche.

I know this can be kind of confusing. At least I think it's kind of confusing to explain. So, why don't I show you with an example.

Let's say that you have the following debts:

Credit Card #1 - $1,000 debt - $30 min. payment

Credit Card #2 - $3,000 debt - $50 min. payment

Car Loan - $6,000 - $300 min. payment

Student Loan - $20,000 - $400 min. payments

The sum of your minimum payments is $780. Let's say you have an extra $1,000 a month in your budget after all the necessary expenses. You'll make the minimum payments on all debts, and the additional $220 will be put towards your Credit Card #1, for a total of $250

After it's paid off, the $250 that was going towards Credit Card #2 will be added to the $50 going towards Credit Card #2, for a total of $300. And after that, you'll have $600 to apply to your car loan, and finally a full $1,000 to apply to your student loans each month.

Becoming debt free will take some dedication. It's easy to just make the minimum payments on your debts and using that extra money towards something that's more enjoyable. But, can you imagine having an extra $1,000 in your budget each month that DOESN'T have to go towards paying off debts?

You might have to be uncomfortable for a couple months as you tighten up your spending, but you'll soon have extra money each month. And I promise you...it is TOTALLY worth it!