Now that your living on a budget and training your money, saving for the important things, and keeping ahead of the game its time to learn a key mechanic to winning the game.
Budgeting and saving becomes easier when the debt is gone. Imagine a locomotive, it starts out slowly and gradually gathers speed until its own momentum carries it at great speeds. It possesses the might to smash through barriers, and is virtually unstoppable. This is how your debt reduction should be, like a locomotive.
Be the Locomotive!
Your debt reduction plan, like the locomotive we discussed starts out slowly and gathers momentum. Budget to pay the minimum payments on all of your bills and debts except for the smallest balance of all your debts and put all of your extra funds on that debt.
Here is an example: After paying all of your utilities, and your Rent/House payment and all of your groceries. You use the money you have left over to pay on your debts. So lets say you have a Visa balance of $150, a Master card balance of $225, an auto loan for $5,500, and a student loan for $25,000. They all require minimum payments of $20, $25, $250, and $400 respectively. After you account for all of these payments lets say you have $45 left over.
Take the $45 left over and use it to pay an extra large payment on the Visa balance because its the smallest. So instead of paying $20 to Visa leaving a balance of $130 for them to charge you interest on you’ll pay them $65 (the $20 minimum + the $45 extra) and have a much smaller balance of $85. The following month in our example you would do the same thing again. Paying another $65 on the remainder of the Visa account would leave a balance of around $20 give or take a buck or two from interest. The following month after that you will be able to pay off your Visa account and have extra left over for the new smallest debt.
See how the momentum builds? Once the first smallest debt is gone you now have that much more to put on the nest one. In our example you were paying an extra $45 dollars a month on your smallest debt for a total of $65 a month. Now you will apply that $65 a month you were paying Visa to the Master card balance because it is the next smallest debt. Your payment will be the $25 minimum + the $65 extra for a total of $90 a month. On a $225 balance you will have that one gone in a little more than two months (Don’t forget you have been paying minimums all along on this balance already so that balance is far less than $225).
So the basic concept is to build momentum with your debts by prioritizing them from smallest to largest and taking them out in order one at a time.
!Remember!
You MUST make minimum payments on all other debts!
Imagine the force at which your locomotive will hit your next debt.
Always prioritize smallest to largest by the size of the balance. Do not take in to account interest rates. Interest is irrelevant to momentum.
In the days to come we will look at what to do with this new found wealth you had buried under debts. Look for New Found Wealth - Part 6. Its a solid solution for a Cracked World!
