A Debt Reduction Schedule That Can Help

Accumulating debt is of growing concern in the United States. Some people believe that you’re supposed to accumulate debt as a part of growing up, because that’s the only way you can eventually buy new cars or purchase your own home. Sometimes debt seems to simply accumulate on its own however, and before you know it, you feel as if it’s overwhelming your financial life. Planning a simple debt reduction schedule and sticking to it can help you get your finances back under control, and even help you become completely debt free if you’d like.

Snowball Method
An extremely effective debt reduction schedule that has helped thousands of people is known as The Debt Snowball. The debt snowball method was made popular by financial author and radio talk show host Dave Ramsey. Using this method, you schedule out your debt payments and build on each as a previous one is fully paid off.

Create a Budget
To setup a debt reduction schedule that helps for an extended period, you need to set up a personal household budget. A budget is simply a spending plan that you put in writing. Total up all of your regular income sources and total up all of your bills–including all regular debt payments–then make adjustments as needed until the money flowing out is no more than the income you’re bringing in. Don’t forget to plan for variable expenses in your budget, because some of your regular spending such as groceries, fluctuates from one month to another.

List All Debts
Create a list of each debt you still have an outstanding balance for. Common debts include personal loans from friends and family, bank loans, vehicle financing, a mortgage and credit cards. Organize your list of debts from the smallest outstanding balance to the largest, and write down the minimum monthly payment for each. Dave Ramsey also suggests writing down how many payments are left until the debt is fully paid off.

Begin Paying Off Debts
Find or create extra money in your budget any way you can think of. Some people choose to work an extra part time job while others simply cut back on their entertainment budget, particularly once they start seeing how fast debt reduction can be. Even a small amount such as $10 or $20 extra will get the ball rolling. Add anything extra to the minimum payment on your smallest debt — the one that’s at the top of your debt list — so that it can be paid in full as quickly as possible.

Snowball Debt Payments
After your first debt is paid in full, add its minimum payment to the minimum payment of the next debt on your list. If your first debt had a minimum monthly payment of $50 and your second debt also has a minimum of $50 per month, after the first one is paid in full you will begin paying $100 towards the second one. This extra payment does not create a hardship in your budget because the funds were previously allocated. Instead, it creates a snowball effect that pays off the second debt twice as fast. Once that one is paid in full, add the first and second minimum payments towards the third debt’s minimum. Continue with this approach until all debts are paid in full.

References
* The Total Money Makeover: A Proven Plan for Financial Fitness; Dave Ramsey; 2007
* Federal Trade Commission: Knee Deep in Debt