08 Aug Methods of paying off debt
With the slow economic growth, rising interest rates and global downturn, no doubt, everyone is feeling the pinch. Especially those with debt. Debt, no matter which way you look at it, is a burden and does not move you any closer to reaching your financial goals nor wealth.
How does one alleviate themselves of this burden you ask? Below, we discuss two methods of how to pay off debt, but before that, as a sign of commitment you have to do the following:
- Destroy or hide your credit card, yes I know it sounds extreme, but whatever you do, do not use your credit card again.
- Readjust your budget – if you eat out 3 or 4 times a week, tune it down to only once a week, you are on a mission, get serious about it!
- Pay extra money towards your debt – because you have readjusted your budget; you have determined your needs from wants – you can afford to pay a little bit more towards your debt…no matter how insignificant it may seem, trust me, it makes a difference.
- Do not create more debt – this is self-defeating, you will feel even more overwhelmed and you will certainly not reach your goal of being debt free.
It’s time to pick a debt payoff plan, get to work and become financially free.
- PAYING OFF DEBT WITH THE HIGHEST INTEREST FIRST
Example illustrated below:
Step 1. List each of your debts in order; from largest to smallest interest rate…if you don’t know what interest each debt has, contact all the institutions you have borrowed from and ask for a detailed statement.
|Account Name||Amount Due||Interest rate||Monthly minimum repayment|
|Standard bank credit card||R 50 000||22.5%||R 900|
|FNB credit card||R 40 000||20.0%||R 600|
|Overdraft||R 50 000||18.00%||R 700|
|Woolworths store card||R 10 000||16.00%||R 120|
Step 2. Commit to paying extra money towards debt with the highest interest, in our example above, clearly the extra money should go to the Standard Bank credit card.
- PAYING OFF THE SMALLEST LOAN FIRST- THE SNOWBALL METHOD
With this method, you pay off the loan with the smallest amount due first then move to the next smallest loan. In our example above, you would pay the Woolworths store card first followed by the FNB credit card. Even though this method might take you longer, paying off debt and closing an account is a huge psychological boost. It gives you motivation to get out of debt completely. So regardless of how long it takes you, stay committed.
Whichever method you use to pay off your debt, do not get discouraged and give up. Forge new good money habits and start your journey to building real wealth.