Getting out of debt is one of the most challenging obstacles when it comes to personal freedom. Debt can be a cruel taskmaster, taking any spare money that you happen to have, and sometimes taking the money that you don’t have to spare.
The ugly truth is that debt is designed to make other people financially better while making you financially worse. It would then seem that to get out of debt would be a great move towards financial freedom. Well, let me tell you, it is.
The good news is that getting out of debt is very possible.
Getting Out Of Debt Without A Gimmick
Ground Rule – Spend Less than You Have
Before you can even entertain the idea of getting out of debt, you first have to correct one simple equation. That is, you have to, absolutely and undeniably, take in more money than you spend. This simple equation is why you are in debt today.
This equation is your debt equation, and over time it determines your total debt standing. Until you correct it, getting out of debt is not possible.
As most equations go, there are two sides to it, which gives us two possible solutions. You can either increase the amount of money coming in, or you can decrease the amount of money you spend. Any combination of these will work, as long as in the end, you are putting out less than you receive.
Once you have that equation balanced in the direction you want it to go. Once you do, you can then proceed to get rid of your debt.
Build A Snowball To Accelerate Getting Out Of Debt
In countless books, and from numerous financial speakers, you can find the phrase Debt Snowball. The reason this phrase is so famous is a simple one: it happens actually to work.
By focusing your extra resources (thanks to our corrected equation above) on a particular debt, we accelerate its payments until the balance is zero. After you have removed that bothersome money leech, you tackle the next one.
The good news is that now you can not only pay what you were before, but you can also throw the resources you were using to pay off the first debt at the second one.
Continue this process until the debts are paid off in full. It builds like a snowball rolling down a hill, getting bigger until you can smash our last debt.
Highest Interest or Lowest Balance First
Once you decide to get out of debt and apply the mechanics of a debt snowball, you have a decision to make. That is, you can start the snowball with the most substantial INTEREST RATE first and work your way down, or you can start with the LOWEST BALANCE first and work your way up. What is the difference? Let’s take a look.
The most cost-effective method to pay off your debts is to start with the highest interest debt first and work your way down. The advantage of this approach is that you end up saving money from the interest over the time it takes to pay everything off. This method can also lead to a faster payoff since you have those funds to apply towards the other debt.
But even as much logical sense as that makes, sometimes starting with the lowest balance works best. This approach gives you a sure win quicker as you can knock out one of your debts faster.
The psychological motivation this gives you should not be overlooked, for a simple reason: it probably wasn’t the most logical decisions that got you into debt in the first place.
Famous money advisor Dave Ramsey is a strong advocate of approaching a debt snowball from this direction, and I tend to agree with him.
Approach Doesn’t Matter
In the end, the path you take doesn’t matter. After all, if you have gotten to this point, you have changed your debt equation for the better.
You are already on the path to correction; you just need to keep things moving in that direction. Having a snowball working in your favor will significantly accelerate the effects of that corrected equation. Deciding which path the snowball takes down the hill is minuscule when compared to the impact it has at the bottom of the hill.
The solution for getting out of debt is a simple one, but it will take time. Once you have your debt equation tilted the right direction, things will start to adjust. As you can see, a snowball can accelerate the outcome considerably.
But there is one more rule you have to follow to be successful. That is, keep the debt equation pointed in the right direction, taking in more than you spend. It really is as simple as that.
Check out some of our favorite Dave Ramsey books: