Debt Management

The Debt Snowball

The Debt Snowball
I’ll get straight to the point here. If you have credit card debt and you are serious about getting rid of it, debt consolidation doesn’t have to be your only option. Here is a proven method for getting it paid off as quickly as possible.

Why The Debt Snowball?

This is a very popular method for reducing your credit card debt. It’s taught by many financial experts and credit professionals, and for good reason. This method is part math and part emotion, which is also why it’s popularity is increasing.

Best Cash Back Credit Card

Have you been looking for the best cash back credit card on the market lately? If so have you ever stopped and asked yourself why?

I have owned quite a few of these credit cards in the past with cash back rewards ranging from 1% to 5%. I have never profited anything from these cards. I started out with great intentions and a plan to make money by getting back a portion of what I spent every month. On paper this is a solid plan, but in reality it came back to bite me.

I’m a modest spender normally and generally only use my credit cards for major purchases. I use them when the amounts are too big to pay with Interac or if I don’t want to carry large amounts of cash on me. This was fine for a while, I was able to make the payments on time and not accrue any interest. The plan was working, I was making money from the cards instead of the other way around. This wouldn’t last.

3 Reasons to Use Cash

Debit Cards, Credit cards, gift cards, point cards the list goes on and on. We are a society of plastic cards and it is plunging us deeper and deeper into debt every year. Sure they are convenient and fit nicely in your wallet but that convenience comes at a price.

Here are what I believe to be the 3 best reasons to cut up the plastic and start paying with cash again.

1. Discounts

Retailers are charged fees by various financial institutions for the ability to accept credit and debit cards. Sometimes it is a fee per transaction and other times it is a set monthly fee. You can bet that they are going to find a way to pass those fees on to you. Weather it’s a simple price increase or a 25 cent fee added at the time you swipe your card, they will charge you for the privilege of using your plastic.

Besides the fees retailers are charged there is the time it takes to collect, store, reconcile and process all those little transaction slips. Cash all but eliminates that.

You can save a lot of money by just offer to pay for the item in cash. The key to this is to offer 10% less (at least) than the retail price and pull out the cash right on the spot. You can almost always use the power cash to negotiate a better price.

2. Easier to stick to a budget

When you are on a tight budget managing your spending using debit cards may seem like a good idea but you are actually more likely to overspend and blow the budget.

There is something about handing over the cash that stings a little; it no longer becomes just a number on your monthly statement. You can physically see that you have less and that alone can be enough to spend it a little more wisely, even make you question if you really “need” that item that you can’t live without.

3. Security

Credit card numbers are stolen thousands of times everyday, and if your card numbers are stolen the thieves will withdrawal cash or make unauthorized purchases right up to the limit. Many times you are covered and not required to pay back the stolen money but you do have to have your cards replaced and many times there are forms that need to be filled out in order to prove that you are innocent.

This also happens to debit cards, and a simple everyday transaction can result in your bank account being wiped out.

So that is it and remember as long as you aren’t carrying around a briefcase full of money, cash is a much safer and cheaper way to pay for those everyday purchases.

Getting Your Debt Organized

Before you can start to eliminate your debt you need to know exactly how much you owe and to whom it’s owed to. This doesn’t have to be a difficult process, a simple excel spreadsheet will do as seen below.

(Click to Enlarge)

*NOTE* You will notice that there is no mortgage listed above. While it is considered a debt, for your own sanity it’s best to concentrate on your smaller consumer debt first.

Getting Organized

Sometimes your credit card statements aren’t up to date, especially if you are continuing to add to them or are making more than one payment per month.

It’s important to call the number either listed on your statement or the back of your card and get the most recent balance.

You can organize your debts however you like, by monthly payments, interest rates or total by creditor. There is really no right or wrong way.

Know Your Numbers

Many people don’t know what their total debt is. Ignorance will almost always lead you deeper into debt. By being conscious of your debt and knowing what you owe you will be in a better position to stop it before it gets out of control.

Your Debt Plan

Now that you know what your total debt is, you can start to develop a plan to get it paid off as soon as possible. After all that is the goal right?

One of the most effective ways to eliminate your debt quickly is by utilizing a debt snowball. You can read more about how to properly use the debt snowball here.

How I Got into Debt

I wish I was making this up but this is a step by step guide on how I got into a ton of debt over the years. My goal here is to help you avoid some of the mistakes that I made and hopefully set you up for a better financial future.

Step 1

Get a student loan and ask for more than you need.

Post secondary education is a very valuable asset and a worthy pursuit; unfortunately this can come with a very large price tag. I wasn’t fortunate enough to qualify for a scholarship and had to foot the bill on my own. Lucky I managed to avoid taking out a student loan and went to a local college where I could afford the tuition (barely). Many of my friends are still paying off their student loans today.

Student loans can burden you for many years after you graduate and if your chosen career doesn’t work out it could take you a very long time to pay the loans back. If you can find a similar program at a local college or university seriously consider attending and save some big money and stress. (if you have kids set up a college fund for them now and ease the burden later)

Step 2

Get a credit card and use it for everyday purchases.

I used to buy groceries, gas and convenience store items on my credit cards with the intention of paying them back right away. While I did manage to collect some big rewards I managed to accumulate a small balance each month that seemed to grow bigger every week until I could only afford the minimum payments.

Many people will tell you to never get a credit card, and for many people that have poor spending and budgeting habits such as I did when I was younger that is sound advice. If you are not an impulsive buyer or use it for everyday purchases though a credit card may in fact be beneficial in helping you build a good credit score. A good credit score is essential if you want to buy a home in the future and not get a terrible interest rate. That is if you are planning on getting a mortgage.

Step 3

Leasing a new car

My first car I ever owned was leased, it looked great and I loved it. After about a year or so the novelty wore off and I was stuck with a 1 year old car that was worth much less than I owed on it. 4 years after that and I decided to buy it out (with borrowed money of course), for about $1000 more than it was worth and then had to pay to have it certified. It took me 8 years to pay for this new car, not to mention the thousands of dollars I paid in interest. Avoid leases and payment plans, if you need a car buy used and save up for a new car.

Step 4

Buy a house with a 25 year mortgage

Did you know that you can buy a home with $0 down? I did and I almost lost it. After a few months I was in over my head.

As a rule you should aim for no more than a 15 year mortgage and put down at least 25% of the purchase price as a down payment. You can get away with 20% in some cases, other than that you should rent and save until you have enough. When it comes to payments if your mortgage payments are more than 40% of your gross monthly income, you can not afford it. (I would go even lower and limit it to 35%

Step 5

Don’t pay a cent for a year – Furnish your new home on store credit

Those deals seem great at the time and you have every intention of paying off the furniture (couches, TVs, kitchen appliances) before the year is over but sometimes life gets in the way and at the end of it you don’t have enough to pay it all off. Then they get you for the whole amount plus interest (28 % for the whole year. ouch).

That happened to me on my first LCD TV I purchased $1400 turned into $1820 after interest and fees. Save up for these big purchases and pay for them in cash. You would be amazed at the deals you can get just by pulling out a wad of cash and making an offer to pay for the item on the spot.

That is basically how you can a mass a huge amount of debt in a relatively short amount of time. I realize I left out the wedding and the kids but those came after I got my financial act together.

The scary thing is that this is the route that millions of people are taking these days and they are in for a major shock when the debt gets so large that the “consumers” will get “consumed” by the payments until they lose it all or make some major lifestyle changes.