One of the things that people say was quite often is” I can’t use the Profit First system because I have an overdraft.” Or “I have some credit cards that are killing me.” Well guess what you can, and it has a system within it. That’s called debt snowball.
What we do is we quarantine that overdraft, we work out what the minimum repayments need to be to keep the bank happy. The same with any credit card payments and we add those repayments in with your operating expenses when we work out your allocation percentages.
The next step is to look at our expenses. If there’s room in there for wiggle room as cashflow allows, or as we change the nature of expenses, then if there’s extra cash, we pay it off the debt. (You can also use your profit distribution to do this if you want).
We always start with the smallest debt first and that’s a little bit illogical, because mathematics will tell you to start with the one with the biggest interest rate. But mentally, if you start with the smallest debt, and you chip away and chip away and get rid of that one and cancel that credit card, then you chip away at the next one or the next one, then you cancel that debt and you move up the psychological advantage of actually knocking off these other payments works.
Also, what it means is that the minimum repayments we had for those first two credit cards that were knocked off, now we knock them off the next highest step which makes us pay that off quicker, and it snowballs.
So, debt snowballing is a real thing. I know it sounds a little bit odd. But that’s what we do with businesses who have overdrafts or other serious debt that they need to knock off. Profit First is definitely a system that you should be looking at, because it’s probably the only way you’re actually going to get out of that debt cycle.