Crucial Elements to Become Debt-Free

As the old saying goes, the journey of a thousand miles begins with a single step.

It's smart to start small and build. When you tackle the small tasks first, you finish them quickly and see your progress. That gets you fired up about going after larger projects.

So it should come as no surprise that the same approach works with paying off debt. Line up your debts smallest to largest by using the debt snowball, put the tiny one in the crosshairs, and start eliminating. After you pay off the smallest debt, take that payment and apply it to your next smallest debt. Keep going until you are debt-free. As the debts fall, your confidence soars.

Some people, however, believe you should start with the debt that has the highest interest rate. Mathematically, that makes sense. Behaviorally, it's a bad idea.

Let's say you have the following debts:

  • A $12,000 car loan at 5%
  • A $15,000 credit card balance at 14%
  • A student loan balance of $9,000 at 2%
  • An $11,000 small-business loan at 6%

With the high interest approach, you would go after the credit card first, then the business loan, car loan and finally Sallie Mae. But in taking that approach, you ignore some of the most crucial elements of becoming debt-free.

Feel progress early

As humans, we all have a need to feel progress. No one likes to feel like they have worked at something and are no closer to finishing it. If you go after the 14% debt first, you'll see numbers going down on a page, but the monthly payment will stay there for a long time. You don't feel like you're getting traction. Without some sign of progress?for example, a payment disappearing from your budget?you'll get deflated and give up after a few weeks or months, which means all the debts stick around.

It?s behavior, not math

Controlling your money isn?t a math problem. It?s a behavior problem. The best way to beat debt isn?t to break out a slide rule and an abacus; you have to change the way you think about money. Get on a budget, start naming every dollar coming in and going out, use the cash envelope system, and you will immediately see a difference in the way you spend money.

Get support

So that journey of a thousand miles? Wouldn?t it be better if you could share it with people you know and trust? Behavior change is more effective when you get help from others and you?re supported by a community. 

So what about our debt list above? Instead of paying attention to interest rates, attack the student loan first, then the small business, then the car loan, then the credit card. As you pay off one debt, put its monthly payment on the next debt down the line. You'll be stunned at the headway you make.

The debt snowball gives you the "atta boy" or "atta girl" everyone needs to keep their spirits up. If you?re a visual learner, you can try it out for yourself for free. And the envelope system, budget and community you need? You?ll find all those at mytotalmoneymakeover.com, where thousands of folks are beating debt and building wealth every day! You could get debt free on your own, but it?s a more fun and enjoyable journey when it?s shared with other people. Come join us today.

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Source: http://www.daveramsey.com/article/crucial-elements-to-become-debt-free/lifeandmoney_debt

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