Getting into debt is super easy. When starting a business it just adds up overnight. As a business owner you probably have personal and business debt compounding on each other trying to bury you alive. So, to get out of business debt takes a lot more effort than you feel like you have to give.
There’s plenty of get out of debt advice out there from business gurus all the way to nosy neighbors, a very small portion of which may or may not actually help you. We’re going to layout here the process we’ve used to help many small businesses become debt free. At the heart of it is the debt snowball method you might have heard about. We’ve added a couple steps around the method that will maximize its benefits and sometimes speed up the process depending on your cash management system.
You’ll need two of our free tools to follow the steps, both of which can be found at https://incitetax.com/wealth.
- Debt Payment Snowball Spreadsheet
- 9 Questions to Analyze Expenses
Now, the process to get out of debt is 3 simple steps.
- Analyze Your Expenses
- Fill Out the Debt Snowball Calculator
- Stick to Your Plan until the End
This process can be as involved or as surface level as you make it. Simple doesn’t mean easy. It’s going to take some work and discipline. To make sure you get out of business debt as efficiently as possible, we’ll go through each step in detail and at the end, you’ll have a concrete plan with exact payment amounts and the date you can expect to be totally debt free.
Step 1 – Analyze Your Expenses
The purpose of this step is to find available cash that you can put toward your monthly debt payments. As we all know, only making minimum payments will get you nowhere fast. However, if that’s all you can do, then it’s all you can do. Certainly, better than defaulting.
Pull up the 9 Questions to Analyze Expenses PDF you downloaded. You’re going to ask all 9 questions about each expense to determine if it really is contributing to your business or not. The goal is to cut or reduce what expenses you can in order to use that cash for your debt payments. Once you have that amount, set it aside for now, and move on to the next step.
Step 2 – Fill Out the Debt Snowball Calculator
This step might feel overwhelming when you first open up the spreadsheet, but most of what you see is stuff that will auto calculate for you. We’ll go through exactly what you have to input, and the spreadsheet will do the rest. So, if you haven’t already, open up the Debt Payment Snowball Spreadsheet you downloaded, and we’ll start at the top.
Change the BALANCE DATE near the top to the current date. This way all the ending dates will calculate correctly.
Now you are going to put all your debt info into the DEBT TABLE. If there’s any info already in some of the white cells on the table, they are just for example and should be changed. You’ll put in the DEBT NAME, AMOUNT OWED, INTEREST RATE, and MINIMUM PAYMENT for each of your debt obligations. The other columns will automatically calculate.
Take the time to be accurate and list all your debts. Once you’ve completed the Debt Table, notice the DEBT FREE WITHOUT SNOWBALL date underneath.
This next part can be exhilarating to see how much time you can shave off that date using the cash you discovered in the first step.
Go ahead and input that monthly dollar amount from step 1 in the INITIAL SNOWBALL PAYMENT cell.
Now scroll down to find the DEBT FREE WITH SNOWBALL date.
So, in the example shown above, with just minimum payments you’d be debt free in February of 2030. Just by adding $100 extra each month, you will now be debt free by May of 2025. A seemingly small amount of $100 shaved off over 4 and a half years!
Now on the same spreadsheet, pan to the right and find the new payment info for each debt and I’ll explain what’s happening with that extra $100 and why the Snowball Debt Payment method is so amazing.
Notice in the example shown that you are still making your minimum payments and the $100 gets added to one of your debts until it gets paid off. The spreadsheet calculates that for you, but how it works is you always start with the smallest balance debt. That simple. Interest rate or any other terms don’t matter.
So, you’ll see that the $100 extra was added to the original $60 credit card payment and the $800 car payment stays the same. Then once you pay off the credit card, that entire payment of $160 gets added to the next debt payment. In this case the $800 to make it $960.
What happens is your monthly payment gets a boost and will snowball into bigger and bigger monthly payments once some of your debt begins to get paid off. It’s awesome!
Step 3 – Stick to Your Plan
Follow your new payment plan to the letter until all your debt is paid. You’ll get out of business debt quicker than normal, and you’ll save on interest payments. This step seems obvious, but it’s very easy to revert to old habits after a while and think you can use that extra payment money once a debt gets paid off for something else. Don’t do it. The extra cash after all your debts are paid is worth the wait.
Bonus Strategy if you use the Profit First cash management system. You can find even more extra cash to pay down debt in your Profit Account. Decide what portion you’ll take out each quarter and add that to your Snowball Payment. You’ll get out of business debt that much quicker.
This simple process is based on principles that can be applied to your personal debt situation as well. Some people even put their home mortgage on the list, but that is a personal choice and not necessary.
Don’t hesitate to talk to your accountant if you have any questions at all. It’s time to eliminate your debt and speed up your wealth growing opportunities.
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