The Best Strategy to Clear Off Debts
Falling into debts can happen very fast. Indeed, it catches many people off guard. An emergency, delayed salary, job shift, education loan, unemployment, or a new business venture can easily whirlwind you into a debt situation. The most important thing is how to get out of the debt and march to financial freedom. There are two main schools of thoughts on how to get out of debts.
The debt avalanche: In this method, you examine the debt with the highest interest and clear it first. This prevents you from undue overcharge that can worsen the situation. However, the method can be exhaustive and is devoid of motivation because you have to keep fighting all debts. A better alternative is the snowball method.
The snowball method of debt elimination
Unlike the debt avalanche, snowball method involves first clearing debt with small balances. While proponents of the debt avalanche method strongly oppose this method; it delivers better results because people are motivated when they see some debts getting cleared fast and easily.
- Start by preparing accordingly: This is the most important step because you can assess the debt situation. Here, some painful calculations have to be involved. You have to include all the income sources, everything you owe, and ensure not to forget saving. Note that you need to keep expenses as low as possible so that there is some money left in the budget to help eliminate the debt. To make the process simpler consider checking on debt reduction expert firms and use their debt calculator for better planning.
- Identify the balances on every debt: Outline every debt details including the balances, interests, and the minimum amounts you are required to make on a monthly basis. This is a crucial point because you will be able to single out on the loans with minimal balances that can be cleared off faster and with less effort.
- Start clearing the debt with less balance: Focus the extra cash you identified on the budget to clearing the debt with a lower balance. Once the first loan is cleared, commit all the money you were using to pay it and the overheads of the budget to clear the next debt. Your momentum of repaying the loan will grow and every debt will be knocked down.
Here is an example; Figure out a person with an interest-free hospital bill of $1,500, and two credit card debts of $7,000, and $3,500 that have interest rates of 15% and 21% respectively. The best plan will be to clear the interest-free hospital bill which will be faster and easier, then attack the credit card loan with $3,500 without the baggage of the first debt. You will be more motivated and within a couple of months; only one debt will be outstanding.
To get rid of your debts, you have to face reality, and seek help where necessary. You should reach experts on debt management and use their debt calculator regularly to know you are on the right path.