Getting into debt is easy. The lifestyle we have been taught from an early age, practically sets the stage for us to get into debt. Think about the American dream which consists of a house, a college degree and a car. Each of these sets us back on the monetary front. If we act upon the dream, before we know it, we are in debt for hundreds of thousands of dollars. This can put a severe dent in anyone’s journey towards financial freedom.
Now what about getting out of it. This is always the struggle. In fact, this can become a seemingly insurmountable challenge. However, with a little bit of planning, self discipline and tips in this article, we can hopefully take back control of our lives.
There are four methods that we have outlined here that can help you get out of debt. Which one you decide to choose, depends on how much money you owe and other circumstances so read carefully.
Method 1: The Debt Avalanche
This is a great method to get out of debt quickly that is also going to save you a lot of money in doing so. Basically, what this method allows you to do, is prioritize your loans based on the amount of interest owed on each. This is how the method works:
Step 1: Make a list of all your debts and order them depending on the rate of interest owed on each, from highest to lowest.
Step 2: Now start making only minimum payments on all your debts except the one with the highest interest rate. Throw as much money as you can on the loan with the highest interest rate. Continue to do so until this loan is paid off.
Step 3: Once the loan with the highest interest rate is paid off, rinse and repeat this strategy for the next highest interest bearing loan and continue to do so until all debts are paid off.
Although the debt avalanche method saves a lot of money as you implement it as your strategy, it takes time to pay things off. This is because it’s a ‘front-loaded’ strategy and makes you focus on your largest loans first. This could be a downside since it could potentially result in low motivation.
Method 2: The Debt Snowball
The next method on the list is the snowball method. It’s very similar to the avalanche methodology with one difference. You literally reverse the order in which you pay down the loan. To elaborate:
Step 1: Make a list of all your debts and order them depending on the rate of interest owed on each, but reverse it i.e. from lowest to highest.
Step 2: Now start making only minimum payments on all your debts except the one with the lowest interest rate. Throw as much money as you can on the loan with the lowest interest rate. Continue to do so until this loan is paid off.
Step 3: Once the loan with the lowest interest rate is paid off, rinse and repeat this strategy for the next lowest interest bearing loan and continue to do so until all debts are paid off.
The advantage of the snowball strategy is that you are able to see results faster. This instant gratification can motivate some people to stay disciplined and consistent with this strategy. However, this strategy will not save you money in the long run as you will be paying down the accrued interest later on.
Method 3: The Balance Transfer
This is a method that can prove to be super useful and effective in getting out of high-interest credit card loans. For instance, if you have a loan of $10K on a credit that bears a 23% interest rate. As you can imagine, it will be very difficult to get out of this burden.
However, if you look around, you can find and apply for a balance transfer credit card which offers an interest rate of 0% for the first 12 months. This allows you breathing room for a year, where you can accelerate your loan payment by paying down as much of the principal amount as possible. Keep in mind that its vital that you pay off your loan within the 0% introductory APR window. Otherwise, you will land yourself in the same spot once again.
Method 4: The Debt Consolidation method
When you are dealing with multiple sources of loan (multiple credit cards, student loans, car loan, mortgage etc), you are dealing with varying interest rates as well. If you are paying only minimum payments on most of these, pretty soon this can seem like a losing battle. What loan consolidation allows you to do is that you are able to take all your debts and pay them off using a single personal loan. This can help you decrease your overall interest rate and also help simplify your payments. When you are stuck making payments to multiple sources of debt, it becomes easy to miss payments and lose sight of what is owed where. Debt consolidation allows you to focus on a single loan. Do make sure to shop around for the lowest rate that you can possibly get on a personal loan. You can look for some lenders here.
Conclusion
Though you may find yourself under a mountain of debt, getting out of debt can be managed. But you must have a plan in place along with the discipline to execute it. We have outlined a number of methods above that you can leverage in order to beat debt and begin your journey towards financial freedom.
Disclaimer: Like all other posts on Hustle Domain, please keep in mind that this post is for educational and entertainment purposes only and is not meant to be financial advice. Please practice caution and do your own research before investing.