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Baby Step Two: Pay Off Your DebtSubmitted by Rock House Financial on June 20th, 2018
This is probably the hardest baby step, so if you feel discouraged then take a deep breath and do a little visualization. Remember that this step may take some time but you can keep the end in sight and imagine your future self being debt free. How amazing will that feel?
It's going to feel amazing!
I was recently talking with a girl who finally got her student loans paid off. She had about $60,000 in student loans and had been graduated for 8 years when she got it paid off. She got to the point where there was roughly $12,000 left and she received an extra bonus from work and put it all toward her student loans. She said it’s the best thing she ever did; getting that last $12,000 off of her debt. It felt so good! Even though she considered using some of that bonus for other things, in the end, it was worth it to wipe out the debt.
Dave Ramsey’s second baby step is often called the snowball method. This is where you make a list of your debts and start by paying off the lowest balance first while paying the minimum on everything else. Getting your first debt paid off gives you a great little kick of relief. You can close out that credit card or go ahead and forget that login information for your student loan because it’s gone.
Start with the debt with the lowest balance. After that, take the amount you were putting towards that debt—such as the $100 a month towards that credit card that you just paid off—and add it to the minimum you have been paying on your next debt. When that next debt is paid off, take that amount again and add it to the next minimum. This creates a financial snowball that gets bigger as it rolls and soon you’re putting $1000 or more each month toward your debt!
Your Next Action Items:
1. Keep the 401(k) going! If a 401(k) retirement matching program is available, we encourage you to keep doing your match in your 401(k) if it’s available. So if your employer offers a match—for example, if you put in 3% they’ll match you with 3%—we recommend that you should keep doing it. It’s basically free money! You’re getting 100% return on your money. You can’t get it anywhere else and you can’t go back and makeup matches from previous years that you’ve missed. Every investment opportunity outside of that should go towards getting rid of that debt.
2. Let's find a time to chat. It would be very valuable for you to allow me to review your current 401(k) opportunities and review your list of debt so that we can calculate just how soon you will feel the freedom of being debt free. I'm looking forward to chatting!
Next Article: Baby Step Three