Debt Reduction to Debt Free: How To Find Cash to Payoff Debt with the Snowball Payment Plan

Let's face it, debt is a four letter word, and it's becoming the greatest burden we will ever fight off in our lives. Getting our debt under control and figuring out how to get it paid off has never been more important. So many areas of our lives are impacted by debt. Being in debt limits our options in every part of our lives. We must eliminate our debt once and for all!

I recently posted a hub called Becoming Debt Free: The Debt Reduction Snowball Payment Plan. Today I want to answer a question that always comes up in any discussion about paying extra towards debt. WHERE does the extra money come from? So in today's episode of Debt Reduction to Debt Free, I will cover How To Find Cash to Payoff Debt with the Snowball Payment Plan.

As you may recall, the snowball payment plan is about selecting your smallest debt balance and paying a little extra on it every month. As much extra as you can, actually. Then, when that balance is paid off, you take the full amount you had been paying there, and add it to whatever you are paying monthly on the next highest balance. The sticking point is where do you get that initial extra? Let's figure that out right now!

In my day job, I am a cost analyst. In the past, I have been a financial analyst, an accountant and so on. Throughout my career, I have come to understand a saying that goes like this: "If it isn't measured, it cannot be managed." I've heard it phrased different ways, but it always means the same thing.

Basically, it means that if you aren’t keeping track of something, watching what’s going on, you can’t manage it, you can’t make it better. Your personal household budget is what we are talking about specifically here. If you want to work on a debt reduction plan that will take you to being debt free, the first place to look for cash is in your pocket. It doesn’t always work out, but lots of time the money to get started on your debt reduction payment plan, whether you use the snowball debt reduction plan or some other, is right in front of you.

But if you don’t have a budget, and if you don’t track and review your spending habits, becoming debt free is going to be a challenge. Honestly, it’s a little like driving somewhere with your eyes shut.  You know the car is running, and it’s moving, but you can’t tell where you are going, and you can’t very well manage where you are going, if you aren’t looking.

What does this mean? You guessed it. It means you have some work ahead of you. But I will tell you right now, it is nothing that you can’t handle. It’s nothing that you cannot achieve, once you decide you want it bad enough to work hard at it! You have to start tracking what you spend and reviewing it to see if it makes sense, or if you are spending more than you think in certain areas. What you are looking for is places where you can spend less and put it against your debts.

IF you use debit and credit cards for most or all of your purchases, you can use your statements to go backward in time and start the analysis a few month back. But if you use cash very much, or combine purchases a lot on the plastic, it will be easier to do this going forward starting today.

Get some paper and write down categories of what you spend your money on. Here is a short list of possible categories:

• Rent or Mortgage
• Car Payment
• Car Insurance
• Life Insurance
• Consumer Loans
• Credit Card Payments
• Gas
• Food
• Clothing
• Utilities (Water, Sewer, Gas, Electric)
• *Dining out
• *Movies
• *Drinking
• *Smoking
• *Other non-essential spending

* These categories are the most important. If you don’t go out to bars for fun, you can leave off drinking, if you don’t smoke, leave off smoking. But if you spend $20 a week on model trains, give it a category of its own.

The idea of these categories is to make it obvious where you are spending money that could be put to better use, when it comes to trying to payoff debt. It is more okay to lump together payments like the utilities, if you want, as you don’t have much choice about the payments there. But make sure you are getting visibility of where you money is going, by breaking out categories for spending you have choices about. This is where your debt reduction money comes from, this is where your key to becoming debt free may be hiding!

Once you have your categories, start writing down everything you spend in a column, by category. The table below is just a sample. In the beginning, use a different page for each week or month, depending on how fast the columns fill up.

So if you use one page for a month, you will probably only have your mortgage or rent payment in there once.  But you might have a lot of entries in there for fun stuff.  Try not to add those expenses up though, because then you might lose the visibility we are looking for.

Once you have been doing this even just for a week, you might be surprised at how much money you spend in certain areas. If you tend to buy lunch out every day at work, you may start rethinking that idea.  And that’s how this works. Just remember this: You CAN be debt free, you can eliminate all your debt, but it takes time, it takes effort, and it requires that you BE HONEST with yourself and whoever else is in that household with you trying to payoff debt.

This is your new second job. Work on this every day. It should not take long every day to come home and jot down everything you spent for the day. Being honest is very important. After you get comfortable with this, and seeing where all the money is going every month, then you can decide where you can spend less so that you can put that extra toward your debt reduction snowball payment plan. Then it’s time to re-read Becoming Debt Free: The Debt Reduction Snowball Payment Plan.

Thanks loads for coming by today and reading this far! If you have any questions, please let me know. Remember, you CAN do this! It’s hard work, but it’s worth every second of the effort!!