It took me one year to get out of debt and build up an emergency fund. I climbed out of my financial mess by using the snowball method of debt repayment, followed by an aggressive savings plan. According to a recent Credit.com article, there are three reasons holding people back from escaping a financial pit. Some people feel powerless to do anything about their situation. Other people have no financial goals. A third reason people feel stuck in a bad financial situation is because they focus so much on debt that they don’t consider other financial goals and plans such as buying a home or saving for retirement. For me, focus was the key to getting my finances under control. I was motivated by Dave Ramsey’s snowball method of debt elimination. I made massive progress in just 12 months so that I could afford to purchase my first home.
Tackling my smallest debt first
Instead of looking at which credit card had the highest interest rate, I focused on my debt with the smallest balance. I continued to pay the minimum owed on my other debts. I found it most helpful to write down my goals according to each pay date. I singled out one debt at a time. I wrote down the new, lower balance owed on the singled-out debt as well as my corresponding savings balance goal. I tried to grow my savings as I reduced my debt.
Increasing my savings goals
As I eliminated debt, I had more money to put toward my credit cards and debts with higher interest rates. I also had more money to save. I temporarily suspending my retirement savings, except for the 3 percent that my company matched in my 401(k) plan. After I got rid of my medical bills, car loan and credit card debt, I had money to save toward specific goals. In less than a year, I had the 3 percent down payment needed for my first town home purchase.
Shaving 10 years off my mortgage
I now own my second home. Whenever I have unexpected bills, I return to the snowball method. Now that I don’t have a car loan, I am able to save for a future car as well as pay down my mortgage. I’ve cut 10 years off my original 30-year mortgage. I also have the extra money to save into a Roth IRA.
Getting out and staying out of debt for as long as possible is about having a debt-free mentality. I treat debt like a financial emergency. My emergency fund doesn’t always cover unexpected bills so I imagine I’ll always be able to fall back on Dave Ramsey’s snowball method.
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