Debt Snowball

Crown Money where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money Podcast. I'm Jessie Edge and we're joined by CEO Scott Parry. How are you doing?

Good, how you doing?

Yeah, good. Going well. It's Friday afternoon, the sun is shining. I'm feeling good. I'm looking forward to a couple of long weekends coming up. It's just great, good time of year, great time.

So today we're going to talk about a topic which some people are going to find themselves in. Most people won't. But we want to really help out those people who do find themselves in this. It's called a debt snowball. And everyone would have heard of this. I just want to actually spell out what it means to debt snowball. And when do you debt snowball and how's it all sort of unfold there? So we've got client who actually has refinanced their home loan onto the money management system. But she didn't have enough equity to be able to pay off her car loan, her two credit cards and the Harvey Norman store card. So we're just going to run through now how we would actually approach those debts. We couldn't consolidate because there wasn't enough equity. So she got the home loan out of sight, out of mind. And she's got a car loan for 24 grand that's sitting at 8%. She's paying $800 every month on the car loan. She's then got a credit card, five grand. She's got 13% interest on that, paying 200amonth on the credit card and another credit card at 1500 owing at 10% with 150 per month in repayments. And then our friend Harvey Norman, the store card interest free, 2800 owing, she's paying $100 per month there. So that's for a lot of people, quite stressful having four other debts and a home loan. And so what we want to do is just tell you what we would do if we were her in her situation and how to get out of these unconsolid, unsecured debts as fast as we can. So we have the end goal of just having the home loan to pay down. So first things first, when you are running a debt snowball, you really want to look at the quick wins, the psychological benefit of moving forward, feeling progress. And so as a result, a lot of people would argue that you should be paying the highest interest debt offers. In this case, It'd be the 13% 5 grand credit card. However, she has 1500 owing on another credit card at 10%. I would much rather see that 1500 dollars be wiped out first and foremost. So then we can snowball the $150 per month she was paying on that onto the next card. And so where this sits is you want to make minimum payments on every single other debt except for the one that you're snowballing and putting all the focus on. So what does that mean? That means calling up the car loan place and say, hey, calling person, what's the absolute minimum I can pay on this? I'm just finding things a bit tight at the moment. Can I have a repayment holiday? Can. What's the. Can you reduce the repayments anyway, shape or form? I'd also call the other credit card company where we owe five grand saying hey, what's the minimum I've got to pay on this five grand per month. So you do minimum payments on every debt except for the one that you're focusing on. And today we're going to focus on the fifteen hundred dollar credit card because it's a smallest debt and we want to get a quick win straight away. So let's say we've got the credit card. They said for that 5 grand credit card you only need to be paying $100 per month, already paying 200. So we've got an extra $100 per month there. So we now get credit card, 1500 dollars. We were paying 150 per month. We're now going to be paying 250 per month on that credit card because we've reduced the repayment on the other card. That then means that we're going to be able to pay that off in around about six months or thereabouts. And so at paying 250 per month, four months is 1000 times. Another two months is 1500. So we should be able to wipe out our first credit card in six months. So 15.

Can I just jump in there as well and just say that? Absolutely. Throw everything you can at the debts at each time. And so we'll often talk to clients as well about looking around your house. What can you sell on Facebook Marketplace? Do you have a side gig that you can get some extra cash flow? Any bonuses, pay rises, anything. Like every additional bit of cash flow that you have has to be dedicated to that one debt and getting it out of your life. And so that. And that will kind of create that momentum.

Phenomenal point. Yeah. So all surplus that you can get from your budget as well as selling stuff as well as obviously reducing the payments and all the other debts. We are wanting to throw the kitchen sink at this one fifteen hundred dollar credit card. So let's say six months. Worst case scenario, we've cleared that credit card. Now what do we do? Well, we get that 250 per month we're paying on that credit card and we then roll that or snowball that onto the next credit card. We're already paying $100 per month on that one. So now we've got 250 plus 100. We're now paying 350 per month on the credit card where we owe five grand and it's at 13%. We then want to be putting that 350 per month towards that. That's going to take 350 per month for 10 months is three and a half thousand. We then have 1500. I would say we're probably about 13, 14 months. So let's call it a year. So it's going to take one year to clear the second credit card at five grand.

And can I just jump in there as well? Why so, so we've kind of gone straight to the $5,000 credit card at 13%. Why aren't we paying off the Harvey Norman store card at $2,800 being the next smallest debt?

Great question. That's because it's interest free. And so I never want to pay a debt where I'm getting free money from. And so I would wait for that Harvey Norman store card for the interest free period to expire and that's when we'd start focusing in on that debt. Most of them are usually three or four years interest rate. I was just assuming this is a three year interest free play. So we've got three years to make some pay while the sun's shining. We don't want to pay anything off a debt where we're getting it for free. A lot of people think, oh well, I want to pay it all off before the interest kicks in. That would be fair and true if you didn't have other debts. But when you've got other debts, want to take take out the ones who you're paying interest on today and come back to the Harvey Norman. Great question.

And just one other thing we probably haven't mentioned as well is when you start a debt snowball, whenever you're trying to attack and get rid of debt out of your life, if you've got cards, you have to cancel those cards. There's just no option. You have to cut Them up, cut them up and put them up on your wall if you want to just to say, hey, I'm dedicated to this. But as soon as you start paying down a debt, there will be the temptation to spend money on that card again. And we've got to take that temptation away. So that's step one.

Brilliant point. Yeah. There's no point in going through this whole process and you're still spending on the cards, freezing everything. We're cutting up the cards and just forcing yourself not to be able to use those cards. So we can actually make some inroads and create traction there. So we've got credit card number one, 1500, we cleared that in six months. Credit card number two, five grand. We cleared that in just over 12 months. And so we, 18 months in now we've paid six and a half thousand dollars worth of debt off. And what we've got is 350 per month to snowball. This is when I'd come back to the Harvey Norman card. I think at that stage it's going to be pretty close to the interest being sort of up, interest free period being up. And so I then start to run $100 per month on that one plus the 350. So now we're putting 450amonth on Harvey Norman. Based on those numbers there at $2800 debt, we're going to be looking at around about. If I'm just doing all this off the top of my head, so tell me my number.

Close enough. Well done.

So six months it's going to take you to clear Harvey Norman. So we pretty much at the two year mark and we've got rid of the five grand credit card, the 1500 credit card, the 2,800 Harvey Norman.

And now we find by this point as well, you know, people are really excited, especially once you get that first debt paid off and closed. Like there's a real sense of kind of, you know, pride and a sense of achievement and that creates the momentum. So not only are we snowballing the repayments onto the next debt, we're snowballing that, that feeling of momentum. And I want to get rid of these debts and out of my life. So it's a, it's a really positive thing. And we actually find that clients tend to, as they move through each of these debts, they will tend to find a little bit more money out of their living expenses or, you know, whatever it may be. They want to get even more money into paying off these debts.

It's awesome. Yeah, I mean, people are going to get tax returns usually once a year. They may get a pay rise from work. As you were saying, any money, wherever it can come, even if it means driving Uber for 612 months, not forever, but just to be able to get this out of your life, it's going to take so much stress off you. It's going to save your cash flows and stop the bleeding.

What if a client has the option to do a balance transfer?

Yeah, really good question. I would definitely do a balance transfer. If you could balance transfer that five grand and fifteen hundred dollars credit car into a six and a half grand credit card at zero percent. That's a really good question. Now what do we do? We've got no interest on our credit cards having almost zero. That's when I'd really start plowing into the car loan as fast as I possibly can because that's at 8% and 24 grand. So that's. And then obviously the minimum payments on that balance transfer are going to be super minimal. So if you do qualify for a balance transfer, I would highly recommend it. If you're wanting to know where do we look for a balance transfer, go to finder.com click on credit cards balance transfer. They'll list all the balance transfers available in Australia. Finder.com they only do them.

Four credit cards. Yeah. So you can only, you can only do a balance transfer from one credit card to another. And the whole idea is that you get an interest free period and you.

Never ever use that credit card. Because that's where the catch is, so to speak, is as soon as you get a balance transfer, if you use that credit card, then those expenses that you've just purchased on a credit card get 18. So never use a credit shot. If you do a balance transfer, that's the hack, so to speak.

And always make sure you've actually closed the credit card for the previous account that you've done the balance transfer from. Because that is the other catch is that you'll do a balance transfer and then you'll start using the original credit card again as well.

Okay, so we've cleared two credit cards and Harvey Norman card. We're now at a position where we've got 450 month savings because we don't have those repayments, those cards anymore. And we're now going to put that, we're going to snowball that 450 per month onto our car loan which we're paying 800 per month on. So now we're paying 1250amonth on this car loan and 12.50 per month. I'm presuming the 24 grand is obviously a little bit less, but I think we're going to be looking at close to 18 months or so until we can actually get close to clearing that car loan. So that whole process is taking us close to three years, which is a lot better. Car loans usually paid out over five years or seven years. And obviously we have taken into account any lump sums, any sale from any things around the house, any extra work or any jobs or any tax returns. We're just saying nothing else has been able to be created in terms of surplus. But at 1250 per month on a 24 grand debt, we're going to make some serious inroads on that and you're going to see that plummet down and then we're debt free, personally unsecured debt. We now have got 1250 per month, and guess where that's going, ladies and gentlemen?

Into the home loan.

And so that 1250 per month going into your home loan is 1250 per month you didn't have, which is now 1250 per month in equity that you're creating in your home. So yeah, you might be able to take the foot off the accelerator and sort of say, okay, well just do an extra thousand per month and sort of have an extra 250 for living expenses, because you've caught it pretty tight over the last few years. But that's really debt snowball. That's how you get rid of all your cards, personal loans, car loans, and in what order we just map that out is we want to go for the smallest debt first, even though it may be at a higher interest rate, just to get that quick win. Progress equals happiness. As soon as we've done that, we then snowball the repayment from that debt we just paid out onto the next debt. And then once we paid that out, we snowball those two payments onto the next debt and so on and so forth. So that's as simple and as complicated as it is. I know just hearing this, it probably doesn't make a lot of sense, but when we sort of map out your situation, if you are in this position, we run this debt snowball program for you. Like we tell you what you need to be paying, when you need to be paying it. We hold your hand the whole way. You don't need to do this or work this out yourself. We have a calculator and we just step it out. These are the steps, these are the dates. We should have every single debt paid. Off. And then from that perspective, that's where we can add the most amount of value by giving that information.

Great. That's awesome. Thank you so much for that, Scott. Really great information. And if anybody. Again, if you need help with a debt snowball, if you have some debts you want to talk about, you know, just reach out. That's what we're here for. We've done this so many times, and we can absolutely help you put that in place. So good luck, everyone. Thanks, Scott. And we'll see you again next week.

Thanks, Jesse. See you soon.