Financial stress is a big problem for many people. To reduce this stress, you need to understand what’s causing it and make some changes.
One way to do this is to pay off your debts effectively. In this article, we’ll discuss how to do this using the debt snowball method.
1. Know Your Income and Expenses
Whether you’re living on a single income or have several sources of cash coming in, you have to know what your net income is and where your money is going. To do that, you need to track your spending for at least a month and then create a budget.
Once you’ve figured out what your expenses are and how much debt you’re carrying, you can start working on a plan to get rid of it all. You can increase your savings by paying yourself first (like with a 401(k)), cut unnecessary expenses like eating out or entertainment, or work on increasing your income by starting a side hustle, negotiating a raise, asking for an internship, or selling stuff. You can also put more toward your debts by cutting back on non-necessary purchases and paying for things with cash, which helps curb impulse buying. You can also set goals for yourself and write them down, which makes you 42% more likely to achieve them.
2. Create a Budget
A budget is a way to plan how much you’re spending and where your money goes. It can help you find places where you can cut back without too much of a negative impact on your life. It can also help you stick to your debt-payoff goals by showing you how much you need to save or cut back each month.
The first step in creating a budget is to collect all of your debt statements and balances, along with the interest rate on each. Once you have a list, you can start by paying more than the minimum on your debts each month.
For extra income, you can start a side hustle, ask for a raise, work overtime or sell things you don’t need anymore. Increasing your income can help you make bigger payments on your debt and get it paid off faster. You can also use a debt calculator to see how much you’ll save by paying off your debt sooner.
3. Set Goals
Getting out of debt isn’t easy, and financial stress can affect your physical and mental health. It’s important to stay focused and motivated by setting clear goals for yourself and sticking to them, even when life throws you curve balls.
Whether it’s an unexpected medical expense or a new job that requires higher wages, you can overcome many money obstacles by taking control of your finances and committing to making consistent payments on time.
A good way to get started is by creating a budget, which helps you see all the money coming in and going out of your household each month. After subtracting your fixed expenses, this will show you the amount of free cash flow that you can use to cover variable costs and pay down debt. Once you have a solid budget in place, it’s important to prioritize your debt payment plan. Starting with the smallest debt can help you build momentum and feel like you’re making progress.
4. Pay Off Your Debts
Whether you have credit card debt, student loans or a mortgage, the sooner you can pay off your outstanding balances, the more money you’ll save in interest costs and be able to put toward other financial goals. Start by determining how much you owe in total and then break it down by each type of debt (revolving, like credit cards, and fixed, like mortgages) and the interest rates you’re paying on them.
Make a plan to start paying off your debt and stick to it, staying current on the minimum monthly payments for all of your loans. Consider using the debt snowball method of paying off your debt, in which you focus on and pay down the smallest debts first. Then, use any extra funds to start knocking out the next smallest debts, building momentum as you go.
Don’t take on new debt and avoid using credit cards, except when needed for emergencies. Each time you add to your outstanding balance, you’re stretching out the length of your loan, increasing the cost and decreasing your motivation.