Small change will clear your debts

Let pennies turn into pounds with Snowball System

For as long as I’ve been a financial planner, I’ve been fascinated by human behaviour.

The two go hand-in-hand in so many ways because we are physical beings run by our emotions.

When it comes to debt repayment, we need to be aware of this because repaying debt won’t happen overnight and we can easily “yo-yo debt” – pay a little off and put it right back on.

I like to use a different process when it comes to helping people become debt-free because it focuses on making you feel good along the way.

It’s called the Snowball System, because your little decisions initially build to make a big difference.

Don’t be frozen by fear

The first thing you must do is face reality and plan from where you are today, not where you wish you were.

Get to know your numbers and make a spreadsheet. For each credit card or loan you have, list the amount, the minimum monthly payment and the interest rate.

There’s a free spreadsheet at WarrenShute.com to help you with this.

Next, try to get the best interest rate you can with each provider. Call them and see if they can reduce the rate you are paying.

After that, you must find a way to have more coming into your account than going out; you need a surplus at the end of the month.

You may have to make some sacrifices but remember the end goal and they will be more than worth it.

Face reality and plan from where you are today, not where you wish you were

Consolidation is cold comfort

I’m not a fan of debt consolidation – where you load all your debts on to one credit card or loan – even if it’s an interest-free arrangement. By keeping your debts separate, you will get a win when you pay each one off – a fantastic feeling of, “Yes, I did it!” If you consolidate your debts, that win comes so much further down the line. Emotionally, that’s a lot tougher.

All downhill from here

Once you’ve got your spreadsheet set up, arrange your debts in order from smallest balance first to the largest balance last – NOT in order of interest rate.

For each debt, set up a Direct Debit from your bills account to pay off the minimum amount every month. By doing this, you will make sure you’re not incurring any extra fees.

To attack your debt, you pay your snowball – the surplus money you have left over each month – on to the smallest balance first. Your aim is to rapidly and aggressively do whatever it takes to pay that smallest debt off.

Why? To get a dopamine boost. You’ll start feeling good about the process and you’ll be more likely to stay on the plan and not yo-yo.

Once your smallest balance is gone, congratulate yourself – you’ve achieved something great.

Repeat this and you’ll get rid of your debts one by one and feel a little bit freer each time.

Search for The Money Planner podcast online for more money planning ideas.