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  • Posted January 21, 2018

Next Steps (Saving More Part 2)

You should be feeling pretty excited, you’re building momentum and financial independence is on your horizon – not just a dream to be lived by someone else. You’re becoming more aware of your spending habits, and this awareness is allowing you to identify what’s a want vs need; and make the harder decision of postponing gratification for a future goal. You’ve not only identified the goal(s); you’ve also set up account(s) for them and you can now watch the money – bringing you closer to accomplishment!

Now, let’s tackle debt. If you don’t have any – stop reading here. There are several methods of attacking debt, the (2) I focus most heavily on are highest interest rate and lowest balance. I think paying the highest interest rate first is pretty self-explanatory, these are costing you the most money. However, many people need help staying motivated; so paying down the lowest balance first will give you a “win” and show you what’s possible in the shortest amount of time.

You could build an excel spreadsheet to graph out  your options, work with a debt counseling agency or use an online debt snowball payment calculator. The online tool I’m most familiar with is, however if you Google debt snowball you will find many more options – pick the one you are most comfortable using (and is free). All of the tools listed only work if you are honest and realistic about your current situation. If you only have $25 extra each month, then use that number. Using a higher, unsustainable, number will only lead to this being discarded.

Initially don’t include your mortgage. If you have a higher than average interest rate (> 6.5%) on your primary residence, consider talking to a mortgage lender for a refinance – but don’t start adding additional payments to be mortgage free (again, this applies to those with a lot of other debt). Typically the first debts you are going to want to address are going to be your credit cards, because they generally have high interest rates – especially store cards.

Understand your spending habits (see part 1). If you are still using the card(s),  you will need to stop to realize any success with the snowball. You want to get the balance down as quickly as possible so the finance charges stop – if you get to a state of equilibrium, where you have a balance but it’s not increasing through purchases; you are still paying additional amounts in interest every month. Once you’ve got the card(s) paid down, if you want to continue using it – and you can pay it in full each month – go ahead.

When you’re using a tool like the debt snowball you should focus on (1) debt at a time. This allows you to maximize the amount you knock down each month. When the first debt is paid off, you will take the payment you had been making and add it to the payment of the second debt (and so on). This is the power of the snowball – you gain momentum over time, and can in some instances shave years and tens of thousands of dollars of interest off – if you are disciplined and consistent. Good luck.