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How the debt snowball plan reduces reliance on payday loans

[Aug 26, 2011.]

 

While being faced with a financial emergency such as needing to pay for an expensive medicine for your child or for a car repair in order to drive to work is always an unpleasant experience, it can be far worse if you don't have any savings. One of the main reasons many consumers lack savings is that they are devoting too much of their income to paying bills, especially credit card debt.


To become financially solvent, you'll need to do two things: start an emergency fund by paying yourself first with an automatic transfer into a savings account from every paycheck, and reduce your debt.


Ramsey recommends starting with baby steps toward financial security, so rather than focusing on saving three to six months of your salary for an emergency fund, start with a goal as small as $100 or $200. If you can set aside five or 10 percent of your take-home pay from each paycheck, you can build an emergency fund more quickly, but you may want to start with just a weekly transfer of $10 or $20 into a savings account. As you get used to the small amount you can increase it. Ramsey says your emergency fund should have $1,000 in it before you start tackling your debt problems.


Debt snowball plan


Ramsey's debt snowball plan works in a different way from many other debt reduction plans in one main way: instead of suggesting you pay off your debt with the highest interest rate, he suggests starting with the smallest debt first. The psychological boost you get from paying off one debt in full can give you the extra discipline to keep going until you become debt-free.


Here's how the debt snowball plan works:



  • Make a list of all your debts from the smallest one to the largest one, except for your mortgage if you are a homeowner.

  • Pay the minimum payment on all your debts except for the smallest one and make sure you pay your bills on time to improve your credit score.

  • Gather every single extra dollar you can to pay off the smallest debt by slashing your spending.

  • Once the smallest debt is repaid, make the list again. You'll have more to spend on the next debt because you won't be making any more payments on that first debt.

  • Keep redoing the list again and again as you repay your debts.


If you want to get out of debt and gain control of your finances, you will need to stay dedicated to your goal and disciplined. The rewards will come in the form of peace of mind, knowing that you can handle any emergencies that come your way in the future.

 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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