Debt can be like a snowman. It starts small with a few snowflakes bound together which becomes a snowball. As this snowball rolls around in more snow, it slowly grows, almost imperceptibly. Before you know it, this snowball/debt is big enough for the bottom of a snowman, much larger than a snowball.
The snowball works both ways. People can snowball into debt, but amazingly people can snowball back out of it too. Of course snowballing out of it takes more planning, dedication and work, but people still can snowball right out of debt just as they snowballed into it. The key is managing the debt.
Let's say that a person has a home loan, a car loan, some student loans, and some credit card debt and some medical debt. It's very easy to have debt in all these areas and many people do. It started small, maybe as a car loan and a student loan, then a little credit card debt. Then, a person got married and had a couple of kids and took out a mortgage. Then, they had a couple small medical emergencies and gained some medical debt. Because of this they also got behind on some bills and ended up charging some things and only making the minimum payments for a few months. This is the danger zone where things can spiral out of control. It can easily happen and does to people who really try and keep things under control, but, life happens, and if a person has not truly planned ahead for emergencies, a person can find themselves in a bad state in not too long of a time.
So, this hypothetical person takes their budget and looks at it hard. How to turn this around?
Providing the person has a regular income, it can be done. A few things to look at are:
1. Any expendable income. People will often say there is no expendable income which is why they are in this fix. They will say this sometimes with a Mountain Dew or Coffee in their hands they bought at the convenience store. What they have in their hand is expendable income. It is unnecessary. So, what a person wants and what a person needs are two different things. So a person needs to take a serious look at this. This is probably the hardest part because people like to reward themselves after they work hard because it keeps them feeling like they have something to work hard for. Cutting back the small rewards makes them feel demoralized and like giving up. Here is where you change your thinking (Change your think into a thunk!). Right now, for this time, the reward is seeing the debt paid down. THAT is the reward! And what better reward can you have than being able to someday buy that reward you want without guilt. So, nearly anything from a convenience store besides gas=expendable income. Those new clothes=very likely expendable income. That extra box of cookies=expendable income. They key is to cut expenses back until you have
something, anything to go towards your debts. So, let's say my hypothetical family (The Joneses) can cut back $75.00 a month by stopping the "rewards" to themselves. The Joneses struggled with this as it was kind of depressing to acknowledge where they were but they figured they had $75.00 to work with towards more financial freedom.
2. Which loans have the highest interest rates? This is generally going to be credit card debt. (And if my hypothetical family, The Joneses, has ever missed a payment or the debt is spiraling up, the credit card companies are going to see that and since The Joneses are a "higher risk" they are going to take well advantage of that and raise their interest rates.) So, The Joneses have 2 credit cards and they begin to take that $75.00 a month and pay it to the highest interest rate card they have. They do that until it's paid off. They had been making a $35.00 a month minimum payment on that but since they paid it off, they no longer have to. So now they have their original $75.00 extra plus the $35.00 a month they were paying on the card they just paid off. This is now $110.00 a month. Now, they take the $110.00 a month and put it on the next credit card until that is paid off. The snowball against debt is growing bigger.
3. The Joneses also look for not just the first expendable income they found, but more ways to save and stretch what they already have. Mrs. Jones had a car she was making payments on at $500.00 a month and this car got 24 miles to the gallon. Mrs. Jones sold that car and bought a car that costs $425.00 a month and it gets 32 miles to the gallon. Now, she has $75.00 more dollars a month plus whatever she is saving on gas per month...lets just say $25.00 for ease. Now Mrs. Jones has $100.00 more dollars a month to pay down debt.
4. Mr and Mrs. Jones are on the same page with this. Of course if Mrs. Jones saved and Mr Jones spent it would not work very well. But the Joneses are on the same page and they do this for a few years and now they have their credit card debt paid off and their medical debt. The Joneses now get credit cards at 0% (yes it really can be done!) and they charge everything (groceries and gas) and get cash back and airline miles. So, whereas they use to pay to use credit cards, they now get paid to use them.
5. The Joneses have been able to save up a small nest egg and pay off Mrs. Jones car and now they have $425.00 extra a month + the $100.00 a month from switching cars plus the original $35.00 a month credit card minimum payment plus the $75.00 a month expendable income. Now they have $635.00 a month expendable income.
6. They keep saving and paying down debt. They have saved enough to make a down payment on an investment that creates cash flow. This might be real estate or some other business that brings money in for them every month but where they don't have to leave their jobs.
7. This snowballs until ideally all their debts are paid and they have a good living and retirement fund. Pretty good for giving up that Coffee and Mountain Dew and making some changes.
Mr. Jones had to consider that maybe he really couldn't afford that coffee that is "only" $4.95 that he "treated" himself to every day. It began with the small things and snowballed slowly over the years to bigger things. It was empowering to say no to the small things while the eyes were on the bigger things. Because once those things were mastered, Mr Jones bought himself a very occasional coffee that came with great satisfaction and no guilt. The Joneses changed their think to a thunk and snowballed their way out of depressing debt that had a stranglehold, one Coffee and Mountain Dew at a time.
