When a person decides to repay his debt and takes the necessary steps to budget, cut down expenses and live within his means, then comes the question of “Which debt repayment strategy is the best according to the various debt reduction philosophies?” At this point, a plan with a comprehensive list of all your debts may come in handy. Choosing a strategy for paying off the debt and resolving to pay consistently till the debt is completely eliminated is very important. Experts have suggested a few strategies that have been tried and tested over the years and proven to be helpful.
1.The Snowball Approach
As the name suggests, a snowball starts small and as it rolls over in snow, the ball becomes bigger and bigger. The Debt Snowball is one of the widespread philosophies financial guru and author Dave Ramsey recommends in his book “The Total Money Makeover”.With the Snowball method, the smallest debt or debt with the lowest balance is tackled first. Devote a considerable amount of money towards paying off the smallest debt while still paying the monthly minimum balance for the rest of your debts. Do this until the smallest debt is paid off then, you can target the second-smallest debt on the list. Cash freed up from the paid debt can now be rolled on to paying the next target to fast-track the settlement. With this method, you are able to accelerate the crossing-out of debts, build momentum and give yourself a good tap on the back. Make time to celebrate your accomplishment, and this will give you the impetus to confront your next challenge. Even though this strategy has been seen to have a very high success rate, it might not be the soundest mathematical approach toward handling debt. This brings me to the next strategy – the Debt Avalanche.
2.The Avalanche Approach
The Debt Avalanche viewpoint which is also sometimes referred to as the “golden rule” seeks to prioritize the debt with the highest interest rate or balance, with the aim of reducing the long-term interest payment and saving yourself lots of money. With this approach, dedicate more money towards paying the debt with the highest interest rate monthly while still paying the monthly minimum balance for the rest of your debts. Do this until the most significant debt is eliminated, then tackle the second-biggest debt on the list. This approach could be very challenging especially if the targeted debt is quite substantial. Applying this tactic requires extra discipline and focus so setting smaller goals and celebrating milestones may be a good idea.
3.The Tsunami Approach
Unlike the avalanche approach, this next method considers emotions when tackling debt. It prioritizes how one feels about the debt and the emotional impact it has on the individual. It has been called the Debt Tsunami by Adam Baker in his book “Man vs debt”. With this method, if you are weighed down psychologically by a particular debt, be it from a relative or a close friend, you may want to divert more resources towards eliminating that debt while paying the minimum balance for all other debts. This approach is very flexible, so flexible that you can lose focus and lose sight of your set goals.
I am not a financial expert or an authority in debt settlement, what I do is to share about my experience and what I have learned over time from the experts. Therefore, the final approach I will be sharing is one we have employed in paying off our credit card debts. What we do is to put down equal amounts for all the debts, eliminating them simultaneously. The plan here is to pay ideally more than twice or at least twice the minimum balance of the debt with the highest interest rate for all debts across board. I am yet to come across an expert recommending this method and am sure most critics will call it unsustainable. If you have just had a significant boost in your income due to a job change or a promotion, or have started making substantial earnings through extra income sources, then this method could be sustained. Motivation and early gratification from quick wins cannot be guaranteed, however, the debt with the lest balance will automatically be eliminated first. Also, if the total debt is enormous, setting mini goals and celebrating milestones as you go will be a great way to gain some encouragement and possibly momentum.
Carefully considering the various approaches and taking a decision based on what best suits you and your current situation is essential. Also, ensure that you do not slip back into debt by remaining financially prudent.