Paying off debt is always one of the most popular New Year's resolutions, and one of the hardest to accomplish. But combine a little commitment with this advice, and maybe you'll finally pull it off this year.
Two of the most common New Year’s resolutions are losing weight and getting rid of debt. They’re actually more similar than you might think — both require planning and discipline. And both have the same essential solution: consume less, exercise more. Only to eliminate debt, you’ll be exercising your mind more than your muscles.
One of the most popular ways to destroy debt is called the snowball method. It’s one that Stacy has been advocating for nearly 20 years, most recently in his book Life or Debt 2010. Watch the video below for an overview, and then read on for more detail and a step-by-step guide.
As Stacy explained, that’s the snowballing technique. Here’s a little more detail on making it work for you.
Step 1: Make a goal
The easiest way to accomplish most anything in life is to create a specific goal that you intend to achieve, including the date by which you intend to achieve it. Then, stay focused by visualizing the ways in which your life will improve once that goal is reached. For example, if losing weight is your goal, you’d decide exactly how many pounds you’ll lose and by what date you intend to lose them. Then, to stay motivated, you’ll make it a routine to visualize what the “new you” will look like, along with the other benefits that will accrue once you’ve lost the weight, like being better able to participate in the physical activities you like, or buying new clothes – whatever it takes to keep you in the game.
If losing debt is your goal, decide exactly how much debt you want to destroy by what date. Then keep yourself motivated by visualizing the rewards: using money you now waste on interest to accomplish things like retiring early, starting your own business, putting your kids through college, buying a house – whatever will provide the greatest incentive to get you started and keep you on track.
Remember, it’s not easy to change habits. Making a concrete goal and visualizing the rewards of achieving it is the single best way to go from wanting something to getting something. Unless you can make your goal more powerful than your existing habits, nothing is going to change.
Step 2: Make a list of your debts in the order you want to tackle them.
Once you’ve decided how much debt you intend to pay off and when you plan to achieve it, it’s time get specific. Your debt-destroying plan will involve finding extra money in your budget (more on that below) and using that extra money to pay more than the minimum on one debt at a time until all your debts are dust. But which should you focus on first?
There are two popular options for attacking debts. The first is to assign the highest priority to the smallest balances – the method Stacy uses in Life or Debt 2010. The other strategy is to first focus on the debt with the highest interest rate, adding whatever additional money you can to that debt until it’s gone.
The reason the smallest-debt strategy is popular is because as small debts are paid off, you feel a sense of accomplishment that makes it easier to keep pressing on. Attacking the highest rate debt first makes the most mathematical sense, since you’re ridding yourself of the most expensive debt first. Based on your personality and the way you motivate yourself, either method will work – Just make a decision and make it happen! And whichever method you use, when you pay off a debt, use the old payments from that debt to attack the next debt on your list – that’s the “snowballing” Stacy referred to in the video above.
If you’d like to see how different scenarios would work for you, plug your debts into a debt calculator and compare the “interest order” and “balance order” options.
Step 3: Create a spending plan.
The more money you can allocate to your debts, the faster they’ll be paid off. Where will you find it? There are only two possibilities – earn more or spend less. The easiest for most people is to spend less. But before you can try to reduce your expenses, you have to know what they are. The way to do that is to create a spending plan, also known as a budget. Tracking and reviewing where your money is going is the only way to uncover potential savings that you can divert to debt destruction.
You can track your expenses any number of ways. A simple pencil and piece of paper has worked for countless families for generations. This isn’t rocket science: you’re just keeping track of the money you spend every day, dividing it into categories, reviewing it – most often monthly – then thinking about ways to reduce it.
But if a pencil and paper seems too last-century, there’s plenty of free high-tech help out there.
- Make a budget from Microsoft Excel (or Calc, the free and fully compatible Open Office version).
- Use a ready-made spreadsheet. Here are some Free Budgeting Spreadsheets, including the one Stacy uses.
- Mint.com is a free resource where you can list your income and debts. You can link to your bank accounts and loans to track your spending, and they have tools to help you plan.
- Bundle.com is a similar free resource that allows account linking and also lets you see how and where others spend their money, which might help you make some tough but smart adjustments to your lifestyle.
Step 4: Execute your plan.
You’ve decided exactly how much debt you’d like to shed, and by when you expect to accomplish it. You’ve ranked your debts for payoff. You’ve created a spending plan so you know exactly where your money is going.
Now it’s time to destroy some debt.
The idea is to use your spending plan to analyze your expenses, and hopefully find some extra money that you can divert to debt destruction. Where will it come from? Any number of places. That’s why you have a spending plan: so you can go over each category of expense and see if you can squeeze some savings out of it without sacrificing your quality of life.
If you’re setting money aside for savings every month, perhaps you’ll decide to temporarily use part or all of that money to destroy debts instead. If you’re spending a lot on eating out at work, maybe you can trying bringing your lunch from home. If you’re paying a lot for cable TV, maybe you can drop it and watch your favorite shows online. Maybe you can lower your insurance bills by raising your deductibles.
The idea is to dig up ways to save and use them to power your debt destruction plan. In fact, that’s what this website is really about – helping you find extra money, as painlessly as possible, that you can use to pay down debt or otherwise become wealthier. That’s why we do stories like 28 Tasty Tips to Save on Food, You Don’t Have to Pay for Cable TV, 18 Tips to Dress for Less, 26 Ways to Save on Entertainment, 12 Things People Buy They Could Get For Free, 7 Things You Should Always Buy Generic and 205 Ways to Save – it’s all about finding extra money without sacrificing your quality of life.
Bottom line? If you’re serious about finding extra money to pay down debts, it’s probably waiting for you, buried in your budget. Use tips like those offered here and elsewhere to dig it up. Keep going and you’ll polish off that debt in record time.
Step 5: If you need help, find it.
As Stacy says in Life or Debt 2010, it’s hard to focus on destroying your debt if your debt is destroying you. If you’ve lost your job, are unable to make your minimum payments or are otherwise in a precarious position, this isn’t the time to use the steps above – it’s the time to reach out and get help. There are three types of organizations that can help you deal with dangerous levels of debt. Stacy’s suggestion is to start with a credit counseling organization, but check out the following stories for more information.