Saturday, January 12, 2013, AM | 1 Comment
If you want to get rid of debt in your life, you don’t care what method to use as long as someone is able to help you get out of debt and be debt free from here to eternity. What do you care about the technicality of what method to use? But financial gurus – and you know there are more than you care to count – advise there are basically two ways to get rid of debt.
Debt is like a Tsunami. When it hits you, it hits you for a long time with some potential serious consequences. You need a debt reduction method in which you pay off your debts in order of their emotional impact.
Your goal should obviously be to live debt-free life
Your goal, for obvious reasons, should be to have control of your financial life especially using credit cards. Don’t let using credit cards overwhelm you so much that eventually you lose your sanity.
Many folks have lost their sanity to credit card debt. Be very discreet to use plastic cards in your wallet for the benefit of your financial livelihood and thus your eventual sanity.
One purpose of having complete control over finance is to be able to increase your cash flow each month. The more cash you save enables you to reduce your debt and invest in your financial future – in stocks, mutual funds, in bonds and so many other options that are available to you.
You would be hard pressed to invest if you have no saving and you are stuck in the quagmire of debt of any kind.
Everybody is different but folks with debt under their belt can use one of two methods to reduce or totally eliminate it.
Lowest balance debt first
Getting rid of your smallest debts first will help encourage confidence and build momentum. Many people find themselves overwhelmed simply by the number of different debts they owe.
Here, you would be tempted to ignore interest rates of your loan. That might turn out to be a mistake. Totally ignoring interest rates can end up costing you a lot of money.
Each debt (your monthly bill) has a minimum monthly payment. When you pay off the lowest balance credit card account first, you are able to remove an entire fixed payment. That gives you the ability to instantly make your existing money stretch further.
This method is known as snowballing in the financial planning industry. The amount of money you send in to each payment gradually snowballs as each debt is reduced. You keep doing it until you are sending in large amounts of cash to attack your biggest debt at the end.
Highest interest first
A successful attempt utilizing this approach will result in paying out the least amount of money. This is very desirable among individuals who draw inspiration from detaching themselves from the emotions of debt altogether.
The reason you wanna follow this method is because it costs more to carry a balance on a high interest rate credit card. Let’s face it. You accrued the debt because you were unable to pay it in the first place.
If it takes you longer to pay off the credit card, the more money it costs you because of the highest interest rate. Therefore, paying off high interest rate debt will save you big money. It usually lets you pay off the debt faster.
In a Nutshell
So which method is better would depend on your overall debt. I would advise to talk to your credit counselor.