So debt is something that affects many people – even if you don’t have credit card debt, you might still have a mortgage or a student loan (this is good debt to have, because in theory, you have purchased something that will benefit you in the long run). Some of the methods discussed today will still be helpful in these situations too.
Today I’m going to go through some debt pay-off methods to show you what is possible. ALL of them take persistence, ESPECIALLY if you are in a lot of debt.
1. Traditional Snowball
This method appears to be attributed to the money guru Dave Ramsey from the US. I have started with this method as I think it is the most flexible and simple, and is the one I use too! I have a free e-book that goes through it in detail, but I’ll summarise for you here.
Let’s say you have 5 debts:
1- £1,000 (min repayment £50)
2- £500 (min repayment £5)
3-£1250 (min repayment £12.50)
4- £100 (min repayment £10)
5-£22,000 (min repayment £500)
Now what a lot of people do is pay a bit of extra off of every debt, and don’t really get anywhere. The snowball method basically allows you to focus on paying the SMALLEST debt first.
The way you do this is by working out how much extra you can pay. It may be that you need to temporarily give up something to free up some spare cash.
When you have the spare cash, you throw this at the smallest debt until it is fully paid off. While this is happening, all you have to do is the pay the minimums on everything else.
Once debt one is paid, you’ll have the extra cash every month to throw at the next smallest debt, PLUS the minimum payment you were originally paying on the debt. Once this is paid off, you’ll have even more spare cash to throw at the next debt and so on.
By the time you get to the largest debt, you’ll have freed up all the minimum repayments from the other 4 debts, plus the extra you found to free yourself from the first one. It helps to pay it off much faster this way, plus I think it works better for your psyche and for your budget this way.
Bear in mind that interest rates ARE NOT taken into consideration, so does go against conventional wisdom, but I’ll get to this point further down.
2. Snowball with an emotional twist
This method is EXACTLY the same as the snowball as described, but instead of putting the debts in order of smallest to biggest, you put them in order of which one you HATE the most. Let’s say the £1,000 debt from the first example was to help out a boyfriend, who then ditched you and left you with the bill. If this was me, I would be spitting venom EVERY TIME I looked at money going out to pay it off.
It’s not the smallest debt, but it is the one that has the most EMOTION surrounding it. Can you imagine how much better you would feel by paying that one off first? Yep, bloody awesome that’s what.
The snowball with a twist is the best one for your psychologically, and I would encourage you to use this method if there is a debt that is especially pissing you off (this is what I will be doing once my flat sells – I have a student loan outstanding and an HMRC tax rebate to pay off – neither have big interest rates, but they both piss me off massively because they put me out of pocket every month by £400!).
This is the method that many in the money industry would be advising you to do. It’s the most logical and is all based on interest rates.
Revisiting our mythical debt situation:
1- £1,000 (min repayment £50) – interest 0%
2- £500 (min repayment £5) – interest 5.5%
3-£1250 (min repayment £12.50) – interest 50.5%
4- £100 (min repayment £10) – interest 1.2%
5-£22,000 (min repayment £500) – interest 10.5%
The avalanche method will ultimately save you the most money in interest repayments, because you start with the debt with the highest interest rate first. The problem with this (in my opinion), is that we’re human and we don’t think like this!
If this method is followed, you’ll have to pay off debt 3 first, then debt 5. This will take ages, and will seriously dent your resolve. Psychologically, paying off small debts for quick wins is far better for motivation than knowing you’ll be saving interest money, but then that’s my opinion!
This is the method that you’ll often seen advertised by banks and other loan agencies. Basically, they offer a lump sum of cash to cover all of your existing debts, and then you only have one payment to make. The same might also apply to using 0% credit cards. You can transfer balances off of store cards and credit cards, and apply it to one card than you pay off bit by bit.
This is all good, as long as you pay attention to a few things.
1- Does the monthly repayment benefit you? When I took out a consolidation loan with my bank, I HALVED my monthly repayment. This has been an absolute blessing, because I have run into some cash flow problems this year, and if I was still paying all of the other payments as they were, I would be in a lot of trouble now. If the monthly repayment changes very little, then look to see if the next point applies.
2- What is the interest rate? When I took out my loan, my interest rate went from over 20% (with all the combined debts) to less than 7%. This is automatically saving me money, because the money I have borrowed is less expensive over time. If the interest rate is HIGHER than what you’re paying already, then walk away and look for another deal.
3- You don’t add to the debt. This is a given with any of the debt-busting methods, but obviously adding to the debt is a big no-no. If you will end up using the consolidation as a way to free up your credit cards to spend more, then DO NOT DO THIS and work on your mindset FIRST.
5. Seek Help From Professionals
Now, all of the above methods are reliant on YOU doing it on your own. However, if your debt gets to overwhelming proportions (as in, the repayments are so high you can’t afford to pay your bills or food), please get help immediately!
There are loads of debt charities out there, but I suggest:
It’s much better to ask for help than it is to struggle alone. Don’t be tempted by anything from a website that sounds too good to be true. I was nearly sucked into a scheme that would have affected me for YEARS, but luckily I got off the phone, researched it, and decided to walk away. There are always options, but it is best to ask for professional help from an adviser in order to get it right.
The advice may not be what you want to do (as in Bankruptcy for example), but this is where the persistence bit comes in. Once you’ve decided to make a change, you need to do WHATEVER IT TAKES to sort it out. Think about it.
Do you really want your life-legacy to be all about debt?
So there you have it, a bit of tough love at the end, but I won’t apologise. Debt is so bad for your physical and mental health. It affects everything – health, work, education, relationships, retirement. It’s a modern day plague, and the sooner we wake up to this as a nation and get rid of it, the better.
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