How to Get out of Debt: Three Debt Payment Strategies You Should Be Trying

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Debt!

The number one struggle for many families. Whether it’s student loans, personal loans or mortgages, most adults have faced a form of debt at least once in a lifetime.

I won’t get into details about how important is to try get out of debt, unless you want to be missing on a lot of great opportunities, you should be trying to pay off your loans as soon as possible.

Here are few of best known debt payment strategies to look into:

The Debt Snowball

The term has been coined by Dave Ramsey in his famous The Total Money Makeover: A Proven Plan for Financial Fitness book.

The strategy is pretty simple:

  • list all your debts
  • order by balance (smallest to biggest)
  • start paying off the smallest balance loans and then move up higher (while paying the minimum on all other loans).

This means that if you have 3 loans: 10K, 1K and 5K, you should be focusing all your efforts for the smallest loan (1K), then use the momentum (and extra money you’ll have each month, after paying off this loan) to attack the second one: 5K and then the 10K loan. (this is just an example to get the idea).

You should ignore the interest rates, just focus on how much you need to pay off and just do it.

It’s a really great strategy for someone who needs a push towards debt payoff, since it gives you a quick win, after paying the small loans, then you’ll use this spiritual (and financial) boost to pay off everything you owe.

Many people lack the discipline to just make those monthly payments and by tackling the smallest debt first it all seems less daunting.

It’s called the Debt Snowball, since it’s just like a snowball than goes downhill: after you pay your first debt, the money you now have each month available will go towards the second debt, making a bigger ‘snowball’, then the third one, until you are finally debt free.

The drawback is that, if you have a bigger loan with a bigger interest rate, you’ll ‘lose’ money each month, since you might be paying off the small interest debt first and not the one that ‘leaks’ the most money.

Anyway, it’s a really great tactic to use and a lot of people have been successful with it.

The Debt Avalanche

If the Debt Snowball strategy is not for you, let’s look int this one:

  • list all your debts
  • order them by interest rate: highest to smallest
  • pay off high interest debt first and move to the smaller ones one by one

Mathematically, this is the better approach since this way you are minimizing loss you incur from your interest rates, by getting rid of the more costly loans.

Debt Consolidation

Sometimes it’s all too overwhelming, so you might solve your financial problems by taking out a new loan that will help you pay off all the other ones.

The strategy is, thus, pretty simple: you borrow money to cover your debt and pay off the loans with this money. Then you diligently start paying off this new ‘final‘ loan.

If you are careful with all the additional taxes that might incur, this method would also help you get your money in order and become debt free.

No matter what solution you choose you do need to pay off your debt. Make sure you set aside money each month, be on time with your payments and work your way up to no more debt.

12 COMMENTS

  1. Simple things like paying off those high interest ones first make all the difference. I think that the majority of the time it is not that people do not know this, because I would like to think that they do and that people generally have a good sense of personal finances, but it is just a matter of them not taking the time to list them all out and see. I try to, but I know that I can be better.

  2. Its true that all people try to pay smallest first because they think, its small and do it first. But then always ignore the interest rate. They don’t know that they are paying more interest in 3rd loan. Because its big loan amount and have big interest rate. As many month you pay late you have to pay more interest rate.

    If you will start from 3rd loan and pay it first. It means you have two small loan are behind and you have to pay low interest rate because amount is small and interest rate also low. So its low interest rate every month.

    We are offering Bookkeeping services for Small businesses and working on Tax Return 2016. We always suggest to our clients to pay Big amount loan first. We always need to follow this strategy and it will help us to save lot of money that will help to

    • Hey Abdul Ghaffar, maybe paying the smallest credits first isn’t the best strategy but I think it’s still a good strategy because it make you focus on getting out of that debt. Also it helps you gain traction because once you are done with the smallest one what the strategy tells you is to keep using the money you used to pay that one with your second smallest balance (plus your usual payment for that balance). Eventually following that strategy will get you out of debt.

      So maybe it’s not the best, but still it’s a good strategy that people can follow, specially because it’s really easy to just list all your credits and see which one is the smallest and focus on paying that one first.

      • I guess anything that can get you to sit down and focus, like you say, that is really the method that will work. If you are like me, you have to recognize those times and really make the most of them. Maybe that is just me, though.

  3. Personal finance is personal for a reason. For some people having a wins under their belt by paying off debt completely to one company is rewarding and keeps them motivated. Other folks find it motivating to pay off the highest interest rate. When people ask me I always tell them that they have to figure out what works for them. As long as they pick a plan and can stick with it, that’s the most important thing.
    Mustard Seed Money recently posted…Is Gold A Good Investment?My Profile

    • This is true. What works for one person may not work for another, so you really do need to know yourself and your habits and weaknesses, and strengths too. It is advisable to know as much as possible about all the options though, so this is a good source for that.

    • You are right about in the end how to pay a debt being a personal decision but it’s good to know what kind strategies can be used. Paying the smallest debt quickly or paying the one with the highest interest first, it really depends on how can it be done, the most important thing is to stick with one strategy and really commit to it.

  4. When you are neck-deep in debt, you may feel that getting out of it would be next thing to impossible! But when you have the will to level up and pay your debts, you would always find a way.

  5. Thank you for mentioning the different ways of getting out of debt. We need to make a good plan to come out of debt. Otherwise, it is simply a waste of hard earned money. We should try and avoid our hard earned money and that will be only possible through a proper debt planning.

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