In the first three posts of the “How Do You Get Out of Debt?” series, you've learned that in order to get out of debt you have to get mad, get naked, start a budget, and put together a $1,000 emergency fund.
Dude! you are now on a roll!
So now that you've taken those first few steps, it's time to kick it up a notch and make your own customized get out of debt plan.
Get Out of Debt Like a Rocket
I like to call it a “Debt Rocket” plan.
“What the heck is a debt rocket plan?” you might ask.
The Debt Rocket Plan
A Debt Rocket plan refers to the process of paying off your debts one at a time, starting with the smallest and working your way up to the largest. As the process of paying off the debt progresses, it picks up speed, allowing you to pay off the debt faster than if you had no plan at all.
Yeah, I know, some people call it a Debt Snowball. It's the exact same thing. But you know what? This is my blog and I get to call it whatever I want. 😉
Seriously though, I like to call it the Debt Rocket because it starts off slowly, like a rocket lifting off the launch pad. But soon it gathers tremendous speed and launches you into the blue sky of debt freedom!
No matter what you call it, it's absolutely the best way to pay off debt period.
A Plan Accomplishes Two Things
Just as you learned in Part 2 of the “How Do You Get Out of Debt Series”, flying by the seat of your pants without a written plan just doesn't work.
When you have a written, rock solid plan that applies specifically to your situation, it does two things:
- It Gives You Hope- When you see your own customized plan written down on paper, you see that it's actually possible to get out of debt. A plan allows your brain and your spirit to click into a new reality and a new hope where before you may have had no hope.
- It Makes Getting Out of Debt Easier- Because you have a prescribed path to follow that you can stick to. When you have a plan that you've put together yourself, that is customized to your situation, you're more likely to stick with it and get the job done.
So How Do You Put Together a Debt Rocket Plan?
Let me show you.
You might want to download the free forms now. They will help you follow this explanation a little easier.
First, put together a list of all of your debts (except for your mortgage, we'll get to that in another post), and organize them from smallest to largest.
Next, write down beside each item what the minimum payment is for that item. If the item is the same amount every month (like a car payment) just write down that fixed payment amount. For items such as credit cards, you can find how much the minimum payment is on your monthly credit card statement.
Now that you have a list of your debts from smallest to largest, continue paying each debt payment every month as you have been, sending in each minimum payment.
However, any extra money over the minimum payment should go completely toward the smallest debt only. Obviously, the more money you put toward that smallest debt, the faster you'll get it paid off.
Accelerate Paying Off Debt
Once the smallest debt is paid off, you continue paying your other debts, but the money you were sending to that smallest debt is now added to the next smallest, which accelerates paying it off and gets it paid quicker.
Repeat this process as you pay off each debt until all the debts are completely paid off.
As you do this, the speed of paying off each debt accelerates, just like the rocket I talked about, and launches you into the blue sky of debt freedom!
One great way to speed up the process even faster is to find any way you can to make extra money to put toward your debt. You already may have begun working extra hours, freelancing, or whatever, to start your small emergency fund that I talked about in the last post.
You can do the same thing while doing the Debt Rocket. When you do that, you will guarantee that your debt gets paid off much more quickly than it otherwise would have.
Questions about the “Debt Rocket”
At this point I'm sure you probably have some questions, so I'll go ahead and address two of the most common ones.
“Why should I pay off my debt this way? Can't I just keep paying my payments normally until all the debts are paid off?”-
- You should use the Debt Rocket technique because first and foremost, it allows you to have a written plan to work from, instead of flying by the seat of your pants. As I explained in Part 2 of this series in the post about budgeting, flying by the seat of your pants just doesn't work and is the main reason why most people get into debt in the first place.
- The Debt Rocket plan allows you to pay off your debt much quicker than if you didn't use the plan.
- It allows you to start seeing results quickly. Getting the smallest debt paid off first usually doesn't take very long, and there is nothing like getting a couple of quick wins under your belt to keep you motivated and on track toward your goal of debt freedom.
Another common question:
“Why wouldn't I pay off the debt with the higher interest first?”-
- Because it's all about changing behavior. Paying off the smallest debt first allows you to see quicker progress toward your goal which helps you stay motivated. I know the math doesn't work, and you may end up paying a little more in this scenario, but it's usually a minimal difference. Successfully changing your behavior is the most important thing at this stage of the game.
So now that you understand how the Debt Rocket works and what it can do for you, it's time to download the forms, fill in the blanks, and start the countdown toward your launch into Financial Freedom! Then, move on to the next post where I show you the next step in the get out of debt process!
If you have any questions about how to fill out and implement your debt rocket plan, just shoot me an email, I'm glad to help!