Debt is something that is extremely easy to get into, but can be much harder to get out of. Being in debt can be scary, overwhelming and can severely restrict someones ability to be financially free. In todays world, to a large extent, debt is normalised. Everyone has a credit card don’t they? Or a mortgage, or a car loan, or student loan debt? Most of these tools can be used responsibly under the right circumstances. However, debt can also place people in overwhelming and extremely stressful situations.
It can become impossible to take steps towards financial freedom when significant amount of your income is going towards paying off your debt. Suddenly when your pay check is eroded by food, bills, petrol, rent and loan repayments there becomes no room for saving or investments. Sadly, this cycle is one that many people find themselves in with no way of knowing how to get out. Rest assured, getting out of debt is possible! No matter how big your debt, there are effective strategies that exist to help you get out of debt successfully.
Top 3 Strategies to get out of Debt
1. The Avalanche Method
The Avalanche Method involves putting as much money into whichever loan has the highest interest rate and making the minimum repayments on the remaining loans. This method is mathematically the most effective way to pay off debt as it ensures that less interest is paid in the process.
As soon as the debt with the highest interest rate is paid off, you can move onto the next debt with the next highest interest rate. With the loan with the biggest interest rate being paid off, you will now have additional money to throw at paying off your remaining loans. This strategy allows for minimal interest to be paid and should mathematically result in the loans being paid off the quickest.
2. The Snowball Method
The Snowball Method involves focusing on paying off the small debt first. The minimum repayment is to be made on all loans, with as much money as possible being put towards the loan with the smallest balance. No consideration is to be given to interest rates.
This strategy is a psychological one that allows for momentum to build up initially through the gratification and relief that comes from paying off a debt in full. It essentially involves the emotion and gratification that comes from the small wins of paying off a debt, to motivate one towards continuing to pay off all remaining debt.
3. The Balance Transfer Method (Credit Cards)
This method works exclusively for credit card debt. The Balance Transfer Method involves transferring the balance of a credit card to another card. The reason this works is because many credit card companies offer cards with either extremely low or no interest on balance transfers for a period of time.
This strategy allows those in credit card debt to temporarily not pay any interest on the debt. This is a major benefit as it it means that more money is going towards actually paying off the principal loan rather than paying interest.
Overall, the strategy that you pick to tackle your debt situation will really depend on individual circumstances that only you have a full understanding of. Paying off debt can seem impossible and overwhelming, but it is possible if you break your debt down and use one of the above strategies to help. Getting out of debt is the first step to getting on top of your money and can open up many doors in the personal finance world.
If you have a significant amount of debt, it may be wise to seek advice from a professional financial advisor.
Out of debt and want to take your next steps on your personal finance journey? Check out my Top 5 Personal Finance Books to get you started.
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