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For many people, getting out of debt may seem impossible. But if you focus on paying more than what’s owed on your minimum monthly balance, it might be easier than you realize, according to Get Rich Slowly founder J.D. Roth.
“The whole idea is you’re just trying to throw as much money as possible at these debts so you get them paid off quickly,” Roth tells NBC News BETTER.
Roth calls this the “debt snowball,” a method made popular by businessman and author Dave Ramsey.
Let’s say you have five debts that total $1,000 a month. Eventually, you pay off one of those debts, and bring down your monthly payment to $800. Instead of paying the minimum, you continue paying $1,000 until your debts are all fully paid.
That includes using any raises, bonuses or windfalls to pay off those debts, Roth says.
“You just continue to throw that money at your debt repayment and by doing so — as you’re making more than minimum payments — the debt gets repaid much more quickly,” Roth says.
The blogger said he used the method to get out of $35,000 of consumer debt when he was in his mid-30s.
“It took 39 months [just over 3 years] to pay off the $35,000 once I started focusing on it,” Roth says.
For many people who manage to pay off their debts, staying out of debt becomes the new struggle, according to Roth.
“I know a lot of people who have gotten out of debt, and once they do they’re kind of lost,” he says. “They don’t know what to do with their money next. So they go out and they start spending again, and it’s kind of like losing weight … they get into the same problems they used to have where they’re spending too much.”
You can avoid this problem by building a “wealth snowball,” he says. Instead of spending the $1,000 you were putting toward your debts, he explains, “Use that $1,000 a month to save for the future.”
You can put the money towards a retirement account, savings for a house or for your children’s college education, he says. It all depends on your personal needs.
“Start building a wealth snowball where you’re socking the money away every month in a retirement account, preferably, because they carry tax advantages. But if not retirement accounts, then in investment accounts where you’re getting returns on your investments, and these returns can compound over time, creating this wealth snowball that’s similar to a debt snowball.”
There are ways you can probably contribute to a wealth snowball that you don’t realize, according to Roth.
One of the biggest expenses most people can cut back on, he says, are subscriptions and recurring monthly expenses.
“Nowadays, it’s a big thing to try to get consumers to sign up for subscription services,” Roth says. “Everything from Netflix to even Microsoft Office is subscription based.”
Individually, these subscriptions may seem small, but can add up. And getting rid of at least one can give you extra money to contribute to your wealth snowball.
“What I encourage people to do is to keep a close eye on the recurring monthly expenses because they act as an anchor dragging you down so that you’re not able to increase that gap between your earnings and your spending,” Roth says.
How much you can contribute to your wealth snowball depends on how much you can afford. If you don’t make a lot, Roth says, it doesn’t mean you can’t save.
“If you’re struggling to get by because your income is low, then it’s going to be tough for you to save say $100 or $250 or $500 a month,” says Roth. “If that’s the case, just make it a target to save $10 or $25 or $50 a month. Every little bit helps.”
And if you can afford to, says Roth, you should contribute as much as you can to a retirement account. For some people, that means contributing 5 percent of their income to a retirement account. For others, it means contributing as much as 50 percent.
“The more aggressive you get,” he says, “the sooner you can retire.”
The most important thing, according to Roth, is that you make an effort to save.
“Whatever you want to accomplish is going to come from that gap between your earning and your spending,” Roth says.
Step 1: Let’s say you just paid off a credit car bill, bringing your total minimum balances on all your debt from $1,000 to $800. Instead of paying the minimum, continue paying $1,000 until your debts are all fully paid. That includes using any raises, bonuses or windfalls to pay off those debts.
Step 2: Once you’re out of debt, build a “wealth snowball”: Now that your debt is repaid, begin contributing the same $1,000 a month to an investment account where it will build interest over time. The more you contribute, the bigger your wealth snowball will grow.
Step 3: To contribute as much as you can to your wealth snowball, cut back on as many unnecessary recurring expenses as possible.
Remember: You don’t need to be rich: Contribute as much money as you afford, whether it’s $200 or $10 a month. Every bit will help.
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