Life is full of uncertainties; we lose a job, we encounter emergencies such as calamities, and unexpected home expenses that challenge our financial situation. And the truth is, there are times that we need to borrow money especially if we haven’t built our fund or savings yet.
Borrowing money or having debt is not bad unless you weren’t able to manage it properly, you have payment lapses, causing your debt to seriously piled up. And if you are on the latter, then this blog is for you. Check out below strategies that you can apply if you are trapped in debt and you would like to pay it successfully.
1. The “Snowball” Method – Popularly known by Dave Ramsey, a personal money-management expert, the snowball method is a debt reduction strategy wherein you start paying from smallest to largest amount regardless of its interest. This technique allows you to gain momentum because of the mini progress you made.
How it works:
- List down all your debts in ascending order.
- Make minimum payments to all your debt.
- Pay a higher portion on your smallest debt and repeat the process.
For example, below are your current debts:
|Loan||Amount of Loan||Interest|
|Cash Loan||10,000 pesos||2 %|
|Car Loan||20,000 pesos||10 %|
|Housing Loan||25,000 pesos||5 %|
|Credit Card Debt||40,000 pesos||15%|
Using the snowball method, you will be paying the monthly minimum requirement for all loans except for the cash loan with the lowest interest. But, let’s say you have an extra 2,000 pesos, you will be using it as a top-up payment for the cash loan. If the minimum monthly payment is 500 pesos, then it will be 500 pesos plus the 2,000 extra payment.
By then, instead of paying the cash loan for 10 months, you can immediately pay it for only four months. In the fifth month, you can now start kicking out next on the list which is the car loan using the same strategy.
Why the snowball method works? Honestly, it’s never about the math, it boils down to the emotion that it brings. When you feel that you’ve easily paid off the first debt, your hopes enable you to continuously do it.
2. The “Snowflake” Method – Unlike the snowball method, the snowflake method encourages you to take minimal steps every day.
The concept is you dedicate a certain amount for your loan payment daily. Given the above loan example, let’s say you have a minimum payment requirement of 500 pesos for the cash loan; you divide it by 30 days, which means you should set aside at least 17 pesos a day. If you have extra money, you will then add it as an extra payment.
The snowflake method instills the idea that creating small steps will lead to bigger gains and becoming debt-free.
3. The “Avalanche” Method – Opposite to the above methods, the avalanche strategy prioritizes paying off debt with the highest interest rate to minimize an exponential or sudden increase in the payable interest.
From the above example, what you will do is pay all of your loans monthly with a minimum amount and then use your extra money to pay off your credit card debt that has the highest interest. After that, you will proceed on the car loan (interest rate), housing loan (5 % interest rate), and lastly, the cash loan (2 % interest rate).
Although the avalanche method seems to be a more sound strategy, choosing a method will depend on you.
Other Related Approach to Implement Above Methods
Aside from the three above, you can also apply below simple yet effective ways to control your expenses and set aside cash to quickly pay your debt.
- Assess Your Current Financial Situation – Above techniques won’t work if you don’t know your current financial situation. Find time, take a seat, and make sure to understand and analyze where you are right now. How much is your total debt? How many companies you have gotten into? How much is your current earning/ income? What’re your current expenses? Do you still have other responsibilities?
These are a few of the questions that you shall answer first to make sure that you can fully implement it.
- Create Multiple Sources of Income – Now that you already know where you are, you may also consider adding or creating other sources of income especially if your assessment shows that your current fund and earning will be insufficient.
You may check on your current skill or talent that you can offer to other people. You can start a little business, something that is conservative and requires little capital to prevent you from losing money as well. You can put up an online business, sell your old but usable stuff (others do call it pre-loved), sell essential items, food, clothes, and others.
- Document Your Debt Payment Goal – Paying debt is a process. Don’t forget to document everything. Update it on an excel file with columns such as Company Name, Payment Date, Amount Paid, Total Amount Paid, Percentage Paid, and the remaining balance.
Documenting every step of the way will not only create an easy visualization but you will also appreciate the progress may it be big or small.
- Walk the Talk and Be Disciplined – Lastly, the most important – be disciplined. Make sure that you are committed to doing it no matter what it takes.
You set your mind and never lose your vision because you know the reasons behind and the benefits that you’ll be receiving right after you paid it a hundred percent.
There are different strategies for paying off your debt, and you have can choose freely on which one do you think will best suit you.
Before starting any methods, remember to think clearly, assess your current situation, and keep the ball rolling.
Again having debt is not fatal as long as you are properly managing it. You just need to decide, commit, and start.