An example of this process would be as follows. If the smallest debt payment was $100 and the second smallest was $150 per month. You now add that $100 towards the second smallest debt. So the new payment would be $250 instead of $150. This will help pay the second one off months sooner without affecting your monthly budget.
Here is a link to calculate how much you can save by making those extra payments on your mortgage loan.
You can continue to save this money and build your savings with compound interest or you can add it to your mortgage payment to save even more in interest charges. This will also allow you to pay off the loan several years earlier.
Once your debts have been paid off with the exception of your house, you can start to build wealth by adding this same amount to your savings. This will grow your wealth and can be increased by compounding interest without any additional efforts. As in the previous example you would be able to put $750 in savings each month. At an APY of 4.75%, this would amount to close to $500 interest in the first year!
Budget example with stacking effect.
Car payment: $400
Balance $10,000 (25 months)
Doctor Bill: $250
Balance $2,500 (10 months)
Credit Card: $100
Balance $1,000 (10 months)
Total bills $750 month. Total balances $13,500.
25 months.
Attack credit card by adding extra $100 to each payment This will allow you to payoff in 5 month versus 10.
Next use that $100 towards dr. bill. Now you are paying $350 versus $250 so it’s paid off in 8.5 months instead of 10.
Then use that $350 towards the car payment and pay $750 instead of $400. This means the total debt will be paid off in 17 months instead of 25 months. This will take even less time if you can get that smallest debt paid off quicker.
Repeat this process until you have paid off all of your debts. Before you realize it, you will be paying an extra $500 or more on one debt without it costing you any extra income. The awesome thing is that the more debts you pay off, the faster the others will disappear due to the snowballing or stacking of all these payments into one. ($100 plus $150 plus $250 etc).
Once you have your emergency fund in place, take the amount of the payment you were paying on your smallest debt and add it to the next smallest debt payment.
Once the smallest debt on the list has been paid off, take the amount you were paying on it and put that money towards saving $1000 for an emergency fund. Keep doing those extra income ideas to get that first thousand put back. This will help prevent any new debt from an unexpected incident.
Once you have that $1000 safe and secure, continue to step 4
Figure out which payoff balance on these is the smallest. Make the minimum payment on all of the bills except for the smallest balance. You want to “attack” this one by paying as much as you can on it to pay it off completely. Some options would be: sell something you don’t need for extra money (yard sale or eBay), work OT if possible, pickup an odd job or side hustle, pack your lunch versus eating out for a week or two. However you can get some extra cash will be great to help payoff that smallest debt. This is called stacking or snowballing.
First step to being financially secure is to create a budget.
Write down all of your monthly bills and each payment amount. This includes medical bills, credit cards, car payments, etc.