Pay off credit card debt, fast. Episode 239
In this video I teach you the best way to pay off credit card debt using Dave Ramsey's Debt Snowball. Do this, and you'll have quick wins and will pay off your debts faster. I review Dave Ramsey's book, The Total Money Makeover in Episode 225
Pay off credit card debt, fast – The Transcript
Hi folks and welcome back to MeaningfulMoney!
Going to talk about the Debt Snowball today – carrying on talking about getting rid of your debt once and for all.
Before I do that I must thank my friends in the bottom right of the screen, Seven Investment Management who continue to sponsor me here on MeaningfulMoney – I'm extremely grateful.
We're going to get rid of your credit card debt one step at a time using a technique called the Debt Snowball. Unfortunately I didn't think up the Debt Snowball, that genius belongs to Dave Ramsey whose book, The Total Money Makeover, I reviewed in Episode 225 and which I highly recommend.
Debt Snowball example
We're going to go through an example of paying off five credit cards with different balances. The five cards are:
- Card 1: £500
- Card 2: £1,000
- Card 3: £1,500
- Card 4: £2,000
- Card 5: £2,000
Not a bad amount of credit card debt, and less than many people will hold.
We talked about budgeting and you're going to need to find every penny you can in your monthly budget to pay down this debt. Let's say you have found £250 per month.
How it works
- First of all, you list your cards in order of outstanding balance, with the smallest first.
- Then you pay the minimum payment against all the credit cards except the smallest one. The amounts are in the graphic on the video.
- Then you pay the rest of your budget against the smallest card, the idea being you pay that off as quickly as possible. In our example you are able to pay off £140 per month which will get rid of the smallest card in just four months.
Why do we do it this way? Quick wins. Paying off your credit card debt this way means that very soon you’re going to get a statement from that smallest card with a zero balance on it, which makes you feel good. The alternative is spreading the budget across all the cards equally, which will take ages to pay off even the smallest card, leading to frustration.
It’s called a Debt Snowball because your payments start to roll up and get bigger. Now that you have paid off the smallest card, you can pay all the money you were paying against that card and pay it against Card number 2, as well as the money you were already paying against that card. So now you are paying £155 per month against Card 2 and it is paid off in just seven months.
Then when Card 2 is paid off, you redirect all the payments you were making and pay them against Card 3 as well as the money you were already paying against it, meaning you are now paying £180 per month against Card 3, paying it off in just nine months.
Pretty soon you’re going to be piling all your monthly £250 budget against the last card and you’re going to see its balance come down fast and eventually paid off.
What do you do when all your credit card debt is gone? That is not the time to give yourself a raise. As you’re used to paying that monthly amount off your debts, you can continue paying that amount every month into savings. But that’ll come later.
There are ways you can accellerate the Debt Snowball even more, and I’m going to talk about those next time, So thanks for watching this one, leave any questions in the comments, and I’ll see you next time.
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