4 Time Proved Ways To Get Out Of Debt
Unfortunately there are no quick ways to get there, but it can be achieved a lot quicker when you choose the method that best suits your temperament.
The methods are concerned with how you rank your outstanding debt to determine which one you will pay off first and then which one you move on to next.
Basically you pay the minimum on all your debts except for the one that is first under the ranking method used, where you pay extra (as much as you can afford) on it each month until it is paid off. You then apply this extra along with the debt payment from the first debt to the next debt in the series and so on, using the compound effect to make bigger and bigger payments on a single debt.
At first the payments seem small compared to the debt mountain, but from the experience of others, a consistent approach and time using these methods will see the payment increase resulting in the debt mountain being worn down and eliminated.
Here are the 4 most commonly recommended methods discussed in the personal finance community:
Debt Snowball –This is Dave Ramsey’s preferred method for ranking and paying down debt. He details the method in his book Total Money Makeover and is used in his Baby Step 2. The debts are ranked from lowest amount outstanding to the highest. The lowest amount is attacked first.
The reasoning behind this method is that the small victories you get at the beginning of the process will help to keep you motivated to continue on as the snowball (the amount you are paying off the debt) grows and you start to see some real big amounts being paid off.
Debt Tsunami – The debts are ranked from the one that will have the most emotional impact when paid off to the one that has the least. This is championed by Man Vs Debt and you can read all about it here. The motivation impact of paying down and eliminating the most hated debt will keep you going through to the end.
Debt Cascade – This is a slightly more involved ranking system, in that you need to do calculation to determine the ranking. The first step is to divide each of the debts by the month payment to find the number of payments needed to pay it off (ignoring interest). The debt with the lowest number of payments is paid off first with the extra you have managed to find in your budget. You then move on to the next debt.
Debt Highest to Lowest Rate – Debts are ranked from the highest interest rate to the lowest rate, with the highest interest rate paid first. This is mathematically the best method because you pay the least interest thus saving in overall payments. This method does not take into account the motivational impact of small victories or the emotional impact of getting rid of the hated debt. But if you can stay motivated by the interest savings this will work out well.
From my situation the various methods give the rankings are follows:
Personally I prefer the idea of the small initial victories to get you started and it is for that reason I am going to go with the debt snowball.
There are a few things you can do on top of these methods to work along with making regular extra payments. None of them do away with the necessity of staying motivated and disciplined to work systematically through your debts paying more on your debts over time.
The things that can help are: sell off some of your stuff you don’t need and paying the proceeds against your debt, using your savings to pay off debt and using debt transfers and consolidation to reduce the interest you are paying and applying that savings to pay down the debt outstanding quicker.
You do need to be careful you don’t slip back into the bad habits that built the debt in the first place ending up in a worse place than when you started. Focus and consistent discipline are the way to overcome this risk.
I intend to modify the snowball by transferring the debt from high interest credit cards and loans to interest free cards and lower interest loans. I am going to use a modified debt snowball as I like the idea of paying off the small debts and get some victories at the start along with paying less interest along the way.
Are you paying off debt? How do you intend to pay it off? If you have paid off debt, what method did you use?