For many people, get out of debt may seem impossible. But if you’re focused on paying more than is due on your minimum monthly balance, it might be easier than you think, according to Get rich slowly founder JD Roth.
“The idea is that you’re just trying to throw as much money at those debts as possible in order to pay them off quickly,” Roth told NBC News BETTER.
Roth calls it the “debt snowball,” a method made popular by the businessman and author David Ramsey.
First, build a “debt snowball”
Let’s say you have five debts totaling $1,000 per month. Eventually, you pay off one of those debts and reduce your monthly payment to $800. Instead of paying the minimum, you continue to pay $1,000 until your debts are fully paid.
That includes using raises, bonuses or windfall gains to pay off those debts, Roth says.
“You just keep spending that money on paying down your debt and in doing so, because you’re making more than the minimum payments, debt is paid off much faster“, says Roth.
The blogger said he used the method to pay off $35,000 in consumer debt when he was in his 30s.
“It took 39 months [just over 3 years] pay the $35,000 once I started focusing on it,” Roth says.
Once you’re debt-free, build a “wealth snowball”
For many people who manage to pay off their debts, staying out of debt becomes the new battle, according to Roth.
“I know a lot of people who got rid of their debt, and once they do, they’re a bit lost,” he says. “They don’t know what to do with their money next. So they go out and they start spending again, and it’s kind of like losing weight… they end up with the same problems as before where they spend too much.
You can avoid this problem by creating a “wealth snowball,” he says. Instead of spending the $1,000 you used to spend on debt, he explains, “Use that $1,000 a month to save for the future.
You can put the money in a retirement account, savings for a house or for your children’s college education, he says. It all depends on your personal needs.
“Start creating a snowball of wealth where you pocket the money each month in a retirement account, preferably because they have tax advantages. But if it’s not retirement accounts, then in investment accounts where you get returns on your investments, and those returns can add up over time, creating this ball-like snowball of wealth debt snow.
Reduce unnecessary expenses
According to Roth, there are ways to contribute to a snowball of wealth that you don’t realize.
One of the biggest expenses most people can cut, he says, are subscriptions and recurring monthly expenses.
“Nowadays, it’s a big thing to try to get consumers to sign up for subscription services,” Roth says. “Everything from Netflix to even Microsoft Office is subscription-based.”
Individually, these subscriptions may seem small, but they can add up. And getting rid of at least one can give you extra money to contribute to your wealth snowball.
“What I encourage people to do is keep a close eye on recurring monthly expenses because they act like an anchor that drags you down so you can’t increase that gap between your income and your expenses. “, says Roth.
You don’t have to be rich
How much you can contribute to your snowball depends on what you can afford. If you’re not earning much, Roth says, that doesn’t mean you can’t save.
“If you’re struggling to get by because your income is low, it’s going to be hard for you to save, say, $100, $250, or $500 a month,” says Roth. “If that’s the case, just set a goal of saving $10, $25, or $50 a month. Every little bit counts.”
And if you can afford it, Roth says, you should contribute as much to a retirement account as possible. For some people, that means contributing 5% of their income to a retirement account. For others, it means contributing up to 50%.
“The more aggressive you become,” he says, “the sooner you can retire.”
The most important thing, according to Roth, is that you make an effort to save.
“Everything you want to accomplish will come from that gap between your income and your expenses,” says Roth.
How to Build a “Snowball of Wealth”
Step 1: Let’s say you just paid a credit car bill, which brings your total minimum balance on all your debts from $1,000 to $800. Instead of paying the minimum, keep paying $1,000 until your debts are fully paid. This includes using any raises, bonuses or windfalls to pay off those debts.
2nd step: Once you are debt-free, create a “wealth snowball”: Now that your debt is paid off, start putting the same amount of $1,000 per month into an investment account where it will accrue interest over time. The more you contribute, the bigger your wealth snowball will grow.
Step 3: To contribute as much as possible to your legacy snowball, reduce unnecessary recurring expenses as much as possible.
Remember: you don’t have to be rich: contribute as much money as you can, whether it’s $200 or $10 a month. Every bit will help.
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