What's the process for getting the snowball rolling toward paying off consumer debt?
Before starting a debt snowball plan there needs to be a short term plan for getting ready to pay off debt. The idea itself of being totally debt free is exciting and provides a rush of transforming motivation for any one willing to see the dream. Yet, once the idea settles in, there is also an awesome sense of urgency that could lead to premature action in the way of foolishly allocating money toward debt when it is needed elsewhere. I believe certain requirements need to be met before applying extra toward paying off personal debt otherwise being in debt continues on as an endless, fruitless cycle of trying to get out of debt. I think these are the essential steps:
1. Stop, stop, stop, stop using debt to fund life. Cut up the credit cards - all of them. There is no need to have a credit card for emergencies. In a time of great want the definition of "emergency" changes too easily. At the very least, keep one credit card, place it in a large bowl of water and place the bowl in the freezer. Next time you want to use your credit card, think deep about your needs, wants, and emergencies as you watch the ice melt.
2. Create a zero-based spending plan. In other words, create a budget on paper that allocates every penny before it is actually spent. I've read advice that says to track what you spend for 30 days, then you'll know where it all goes, and then you are better able to create a budget. I disagree. It's a waste of time. I'll be doing more posts on this topic but essentially budgets are never set in stone. A personal budget is fluid and the bottom line changes from month to month. Create the budget first and work it for three months, that will give you an idea of what you're spending and create great habits for running the budget as you begin a debt snowball.
3. Sell something and apply the money to step 4 or 5. This is not an official step in Dave Ramsey's plan even though he does suggest selling stuff. I am making it a step because is proves commitment and of course it creates cash. Most households have something that can be sold on ebay or in a garage sale. Also, what about the car you are making payments on (sorry, that might have stung)?
4. Get current on all past due bills. Past due bills like utilities, phone, etc are vicious enemies of any debt snowball plan. In essence they are debts but they're probably small enough to catch up on in a month or two. If they would take longer than that then perhaps these past due bills need to be placed in the debt snowball plan (as the first items to get paid down).
5. Save $1,000 for a savings account as fast as you can. This is Baby Step 1 in Dave Ramsey' s plan. This is a short term reserve so that you don't have to use a credit card. This may take a while but with the prior three steps in place first saving $1,000 will happen sooner than later. Sell more stuff to achieve this step.
For my family this process took about two months but if you're starting totally from scratch it's plausible that it could take six months or even a year. We already had a zero based spending plan in place, we just needed to pay more attention to it. We cut up our credit cards two years prior as well. Oh, I also sold $1,500 worth of stuff on Craigslist for steps 4 and 5.
The three years prior to starting our debt snowball plan I believed the only answer to our problems was to make more money. I decided to let go of that thought while my wife and I went through Financial Peace University in January 2008. I realized that the drain on our finances had to do with not having the above requirements in place.