Budget 2020 — Part 3 – Kia D. Sanders
Snowballing the Debt
We are back for part 3, this time to snowball our debt. My advice is to continue adding to your savings to the point where you feel secure. Once we are at that point, we will pay our monthly expenses and use the remaining money to pay off each debt (smallest to highest). With this method, you do not need to focus on interest (APR). If you paid the highest amount off first, you will be doing a disservice to yourself. Why? Because you can pay the small amounts quicker and have more money to throw at the larger
Let’s create a fake budget. I will also include this template at the end of the guide for you to complete at home. This will be basic, omitting the investing that I personally do. I want you to get the gist of things. In this case, we will create a STRICT budget which allow us to focus on money management, discipline and lowering our debt to income ratio.
Sample Monthly Budget
Income #1 — $3,000
Income #2 — $500
Additional** (gifts, refund, selling personal items)
Rent/Mortgage — $995
Electricity / Gas / Water — $150
Car note — $300
Car insurance — $90
Phone — $100
Internet — $40
Netflix — $10
Credit Card #1 — $25
Credit Card #2 — $50
Credit Card #3 — $75
Groceries — $200
Gas — $160
Clothing — $100
Allowance** — $100 (I started giving myself a $50 allowance, now, sometimes I go 2 weeks without spending a dime)
Savings** — $100 (minimum $1 — don’t cheat yourself)
Debt owed (smallest to largest, no matter the APR)
Credit Card #1 — $500
Credit Card #2 — $1200
Credit Card #3 — $2000
Car — $12,000
1. EF is saved ($500 minimum)
2. Add up our total income and monthly expenses.
§ Income: $3500 after taxes
§ Expenses: $2495
§ Remaining: $1,005
§ Total debt: $15,700
We have $1,005 remaining after paying bills. Normally, when we have this type of money left over from bills, it’s divided between two paychecks (~500/per pay period). What I like to also do is see what bills are due between the 1st and the 15th. This allows me to know how much wiggle room I have when I begin the snowball method. Let’s use the biweekly pay calendar in this situation.
We have to pay our mortgage, electricity/gas/water, phone, internet and Netflix all between the first half of the month. We pay our car insurance, credit card #1, #2, and #3 the last half of the month. We also need to remember to factor in our costs for our groceries, gas, clothing, allowance and savings. I split these costs into two, pulling the money in cash so I won’t need to use my debit card. This works for me, but to each its own. I used the envelop method for a while, but it just didn’t work for me after a while. I am clumsy, so someone would be in luck if I forgot where I put it!
We have $15,700 in debt, but take home about $1,000 a month. Wouldn’t it be wonderful if we could pay this off in 15 months? Sounds promising, but things happen and budgets change. Let’s focus on what we could do though. We can either: add to our savings to get to $1,000, with $500 remaining to pay the credit card #1 off OR we can throw it all in our savings with a final balance of $2,000. These are options, so choose what you think its best. You can do a 60/40 split or 70/30 (% we take home vs % we save). Also take into account of upcoming expenses, days off, sick children, etc.
So we decided to do the first option. We no longer have 3 credit cards to pay on. That was quick. We are on #2.
Next month’s budget will give us a remaining balance of $1,005 + $25 (CC #1) = $1,030.
Debt Owed — Month #2
CC #2 — $1,150 (min. payment $50)
CC #3 — $1,925 (min. payment $75)
Car — $11,700 — ($300)
Option 1: $1,030 — $500 (savings) = $530
Option 2: $1,030 at CC #2
§ If you choose this, month #3, you will only owe $120 next month to pay. No extra money from a cleared debt this month.
Debt Owed — Month #3
CC #2 — $120 (min. payment $50)
CC #3 — $1,850 (min. payment $75)
Car — $11,400 — ($300)
$1,030 — $120 = $910 remaining for this month. Save or snowball?
Option 1: $910 — $500 (savings) = $410
Option 2: $910 at CC #3
§ If you choose this, month #4, you will only owe $940 next month on CC#3 and have an additional $50 (CC #2) to add to your $1,030 remaining monies.
Month 5-you will have $1,030 + $50 + $75 = $1155 to throw at your car a month. Just think if you cut out other expenses to get finished quicker? Now we are getting hungrier to be debt free. How did we calculate this?
At month 5, our car loan is at $11,100 (not including interest). If we continue to throw money at our debt (no more throwing money into our EF), it will take us about an estimated 9 months to de DEBT FREE.
Do this with your own budget to get an ideal estimate of how long it will take for you to pay your total debt off. I was swamped with medical bills combined with credit card bills that caused too much anxiety. I was dedicated to the budget and I was determined to pay it off. As of today, my credit score jumped because I made another large lump sum of a payment onto my last credit card.
Step 1–3 should be our primary focus. We cannot build our credit without these steps actively completed. Have any questions? Please feel free to email me at [email protected] or send a private note.