If you missed the first installment of the Total Money Makeover series, have no fear just click here.

Let’s back up and do a little recap of Step 1.

Building an Emergency Fund

Before you focus on cutting down on that debt you’ve accumulated, make sure you have $1,000 saved up for an emergency. Do what you need to do to get this $1,000.

Twist and wring out your budget, work extra hours, sell something, have a garage sale, but quickly get your $1,000.

• When you do get your $1,000, HIDE IT. If you keep the money handy, it will get spent. You can put it into savings account, but make sure that it’s not part of your overdraft protection.

Now, when an emergency hits you, you have money in the bank for situations like that. You no longer will have to use a credit card to cover your emergency. You’ve already got it covered. The goal of the Total Money Makeover is to never use your credit card again.

Now, onto the very important step of actually GETTING RID of your debt.

Pay off all debt except the house using the debt snowball

Now it’s time to knock out that debt! List your debts in order, from the smallest balance to the largest. Don’t be concerned with interest rates, unless two debts have a similar payoff balance. In that case, list the one with the higher interest rate first. As you start eliminating debts, you’ll start to build some serious momentum. These quick wins will keep you motivated, so you’ll be able to stay on track.

So, in simple terms, pay off the credit card with the SMALLEST balance. Put as much of your monthly balance as you can towards that debt. Once you pay that off, you can mark it off and feel like you’ve accomplished something.

The idea of the snowball is simple: pay minimum payments on all of your debts except for the smallest one. Then, attack that one with gazelle intensity! Every extra dollar you can get your hands on should be thrown at that smallest debt until it is gone. Then, you attack the second one. Every time you pay a debt off, you add its old minimum payment to your next debt payments.

So, as the snowball rolls over, it picks up more snow. Get it? So, once your smallest debt is paid off you use the money you were using to pay off the first debt PLUS the current debt’s minimum payment to pay off your next smallest debt. You will eventually be able to put more and more money down on each successive debt and eventually…you CAN be debt free.  Debt free from credit cards, loans, etc.

I did this plan and it took me about a year and now I am currently debt free and it feels fantastic. I can save SO much more money each month b/c I don’t have to worry about paying on old debts. It’s very freeing.

I am currently on Step 3 which is building 6 months worth of an emergency fund which I will cover in the next installment.

Do you use credit cards? I only use credit cards in ONE situation. When I am paying a big purchase, such as my laptop I bought recently, I put it on my credit card so I could earn cash back (which was around 60 bucks). BUT, I always make sure I have cash in the back saved up to pay it off IMMEDIATELY. I only put things on credit cards a few times a year. Not constantly putting things on credit cards has helped tremendously in terms of my financial health.

GIVEAWAY ALERT!!

I have the book Total Money Makeover by Dave Ramsey on CD.

I feel so strongly about the Total Money Makeover and how simple and effective it is that I wanted to giveaway a CD copy. I urge all of you to find what step of the process you are at and to focus on getting rid of debt and building some wealth!

TO ENTER:

Simply leave a comment and tell me why you’d want to listen to the CD!

I will announce the winner next Wednesday!