creative ways to pay off debt using especially the snowball effect and other methods, and also how you can essentially implement where necessary the most effective debt payoff strategies.
So, I am going to break it down as
simple as possible as I guide you through creative ways to pay off debt using especially the snowball effect and other methods, and also show you how to get out of debt with no money and bad credit.
Essentially implement where necessary the most effective debt payoff
strategies.In a way be
very wary about people who are offering to help eradicate your credit card debt
or to boost your credit score points.
In a lot of
cases it's going to be taking a piece of the pie, trying to get some money from
you to help you get rid of the credit card bills that you already owe. Just be
very careful with that when you go through this kind of debt payoff journey.
On average, when people graduate from college.
A lot of millennial's are flooded with debt. And if you observe carefully, a lot
of millennial's are going to struggle to get to retirement.
One of
those reasons is because of debt, in that, it holds people back
from not only starting families, and not only buying houses but it holds them
back from contributing to their retirement account and also hold them back from
making life decisions for their long-term future.
Example being, saving for their kids’ college plans because they're not able to save any money as they have so much debt.
Example being, saving for their kids’ college plans because they're not able to save any money as they have so much debt.
Don’t pile
up debt
It is very essential to pay off debt as soon as possible. I think a lot of us know that.
But there's more urgency to it than I think some people might realize. And the
reason for this is because if you look at the current state of the economy a
lot of economists will agree that it's doing fairly well.
Some people
think that it's not doing as well as it looks on paper, but the truth is the unemployment
rates the lowest it's been in a very long time, and the economy is doing pretty
well, at least compared to what it was doing 10 years ago.
Embrace change
So, looking
at that you think well this is good work we are doing well. “I don't worry
about my debt as much’, but I just want to remind you that the economy can
change very quickly and people can lose their jobs. People can get laid off. If
we enter something like what we did 10 years ago people had large amounts of
debt and it was fine at the moment.
Maybe that
house was a little bit too big for them. Maybe they had $10,000 worth of credit
card debt. But you know they were able to get by because they were making pretty good money. So, the reason you need to be very careful is because you
can get laid off or lose a job suddenly, and it's a most impossible start
paying off those bills.
Bankruptcy is not fun
Now let's
talk about the actual strategies when it comes to creative ways to pay off debt.
there are really two strategies. One of them is called the Debt Avalanche
Method and the other is Debt Snowball Method, both of
them are very effective.
I sort of have
a preference for the one that I think is the most effective, and which mathematically
makes the most sense, but we can go over each one of the strategies.
DEBT AVALANCHE
Essentially,
the first strategy that
you can take is what we call the debt avalanche method and what this does is
essentially tackle the highest interest rate debt first. Focus on the highest
interest rate instead of the highest amount owed. Let’s say you have 5 different types of debt and each one of them has a
different interest rate.
Maybe the
credit card interest is the highest at 23%, and you have maybe a personal loan
at 16%. Then you have other type of debt like a student loan at 10% and then
home mortgage at 5% and an auto loan of 4%.
What you do
in this case on the avalanche method for paying off debt is you focus heavily on paying off the
highest interest rate debt first.
Do away
with highest interest rate debts first
DEBT AVALANCHE |
||
Credit
card
|
23%
|
$4,596
|
Personal
Loan
|
16%
|
$6,861
|
Student
Loan
|
10%
|
$30,038
|
Mortgage
|
5%
|
$82,901
|
Auto loan
|
4%
|
$842
|
Note the key to doing this with any debt payoff strategy that you ever use is, you need to make the minimum payment every month for every type of debt that you have.
As soon as
you start missing minimum payments two things happen
- First of all, you get hit with a late fee and when that happens with credit cards you might get a 30 or $40 late fee if you skip your credit card bill. Don't do that.
- This
can end up hurting your credit score. It could mean that you defaulted on
that payment. Which means that you weren’t able to make that payment.
Budget to Pay Off Debt Spreadsheet
So, without
a doubt, you need to make sure that you are making at least the minimum
payments on all of your bills. First take all of the leftover money after you
created a budget with a spreadsheet like Microsoft Excel or you wrote down all
the expenses.
After you
create the budget you found out okay, I have $300 left over at the end of the
month. What should I put this money towards? After you put money towards a minimum payment first, then
you take any leftover money and you focus on the highest interest rate debt
first.
Then once after
that highest interest rate debt first, which is probably going to be credit
card debt which has 23%, then personal loans 16%; all in succession to the debt
with the lowest interest rate being the last thing you have to tackle.
How to know the interest rate on your debts
It might be
personal loans or something that's very high in terms of interest rate. You can
find all these interest rates by simply just calling whoever is giving you that
loan or looking on their website, and checking out on your account to see how
much interest you are paying.
Most people
know how much payments they are making monthly, but they don’t know the
interest rates on such payments.
After
getting the information on your interest rates, have it written down somewhere
so you can look at it. That’s the debt avalanche method, it's paying off the
highest interest rate debt until it is totally gone. Once you eradicate that
debt, then you have four types of debt left.
While of
course paying all the minimum payments you focus on the second highest interest
rate, then you focus on the third highest interest rate, you just go down the
list until you have no debt left over.
What this does is, it really
prioritizes for you to focus on those payments that are going to end up costing
a lot more money if you let them go longer like credit card bills with 23%
interest it is going to be pretty painful in the long run.
You know, a
lot of people have asked me, should they focus on investing or should they focus
on paying off debt– should they put money into their retirement account or
should they pay off their debt because they have all these credit card bills or
different types of loans.
My advice
My personal
choice for this and this is not necessarily advice for you, but this is for
myself. Any debt that I have that is over 5% interest rate for the year, I will
focus on paying them off as much as possible.
If there is
anything less than 5%, I will just pay the required monthly payment for it and
not really worry about it as much because the average stock market is about 7
to 10% per year. So, in a lot of cases anything below 5% I don't really sweat
that much obviously because I am still making those payments. It is not
something I'm focusing on as much as those higher interest rate debt. Now
that's the debt avalanche approach.
It
mathematically makes more sense, but in a lot of cases people struggle to
really use this effectively because they can get discouraged. It's difficult to
make it actually work and to start to really see progress.
The other
method is called the
DEBT SNOWBALL APPROACH TO PAYING OFF DEBT
The idea
here is that, say you have five different types of debt, let’s use same example
like what we just used above, but instead of focusing on the highest interest
rate debt first we are going to instead focus on the lowest payment.
Focus on
the lowest payment
DEBT SNOWBALL |
||
Credit
card
|
23%
|
$4,596
|
Personal
Loan
|
16%
|
$6,861
|
Student
Loan
|
10%
|
$30,038
|
Mortgage
|
5%
|
$82,901
|
Auto loan
|
4%
|
$842
|
So, let's say that between these five different types of debt, the lowest balance debt is going to be your auto loan you only owe $842 more on this auto loan.
You just
focus as much as you can, while of course paying off all of your minimum
payments on all types of five debts every month.
Then you focus on the lowest balance first and then you move on to the second lowest balance.
Then you focus on the lowest balance first and then you move on to the second lowest balance.
What this
does is it allows people to sort of eradicate different types of debt faster
than maybe what you could do with the debt avalanche approach. This kind of
lets people see some progress because, after a few months they suddenly only
have four different bills to pay and then after a few more months maybe only of
three different bills that they pay. So, you are certain to see a lot more
progress.
Debt Snowball Downside Compared with Debt Avalanche
Mathematically
it doesn't make as much sense because you might be paying more in interest over
the course of your debt payoff journey, but psychologically it can make a lot
more sense and a connection can be more effective for some people, especially
if you struggled with paying off bills in the past.
My advice
I think the
debt snowball method would likely be a pretty good route for you. And you know
like I know, they can be difficult to do if you are tied up in several debts. I
am kind of making it sound easy by just saying you can achieve that if you
focus on it.
Conclusion
If you are
still struggling with making a dent in and paying off debt, then you have to
find a way to make more money and it's very possible.