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- I was $40,000 in debt a few years ago with just $1,000 in savings. To clear my debt, I used the debt snowball method — paying down my balances starting with the smallest one.
- I had a car loan, student loans, and some credit card debt. As I paid off the debts, I snowballed those payments into clearing the next-largest debt.
- Once everything was paid off, I directed the money I’d been using for debt payoff into my savings and retirement accounts.
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A few years ago, I was over $40,000 in debt and had $1,000 in emergency savings. I knew I needed to build up my savings, but I also knew that first I had to pay off my debt. I researched the best way to pay off debt, and I came across the debt snowball method, which sounded pretty easy to follow.
I had about $1,000 of credit card debt, and my other two biggest sources of debt were my car loan and my student loan for my Master’s degree. My car loan was just over $18,000 for a brand new 2010 Toyota Corolla, and my Masters degree was from a local university where I funded the two-year degree entirely through federal loans.
The debt snowball method mandates that you attack the smallest debt first, regardless of the interest rate. I started with paying off my credit card debt, and then I stopped using credit cards until all of my debt was paid off.
Next, my car payment was $250 a month and my student loan payment was $120 a month. Because the amount of my car loan was slightly less than my student loan, I decided to pay that down first while still making minimum payments on my student loan.
During that time, I also cut back on eating out and shopping. I decided that I was going to put as much money as I could towards paying off my car loan. I picked up extra tutoring jobs during the school year, and I taught summer school during my break. With the extra money, I started making two car payments a month.
It took me less than three years to pay off the five-year car loan, and I was then ready to attack my student loans. I then took the car payments I was making and “snowballed” them into my student loans, sending in a separate check every month that was applied to the principal of my loan. Because I was snowballing payments, I was putting over $600 a month towards my student loan payments, and it took me another three years to pay off my student loans.
After my student loans were paid off, I was debt free, and it was tempting to fall into the lifestyle-inflation trap. Now that I had a few hundred dollars at my disposal every month, I could afford to eat out every weekend and fill up my online shopping cart. While I did treat myself to those things here and there, I knew that I had to start seriously bulking up my emergency savings.
I continued with tutoring and summer school, and I took the money that was earmarked for debt payments and started stockpiling it in a savings account. I started putting $800 a month into a regular savings account, and once I hit $10,000, I opened up a CD account that yielded about 2% interest. At the end of every calendar year, I transfer my savings from my regular checking account to a CD.
I now have enough savings to replace my income for six months, and I am continuing to add to my savings while contributing to my 401(k) and a Roth IRA.
The debt snowball worked well for me, partly because I didn’t have any huge emergencies in those years. Also, paying off my smallest debt first gave me a psychological boost. It was encouraging to see my debt go down so quickly and anticipate when I could use those payments to grow my savings.
While there are many ways to build up a savings nest egg, being totally debt free first was the stepping stone that helped me build my six-month emergency savings.