Categorized | Debt

The Top Four Debt Repayment Strategies

Debt Snowball

The beginning of a debt repayment plan is hailed as the most difficult. It is at this point that credit seems at its most overwhelming. Denial is a feature that leaves debtors with an underlying sense of dread that hasn’t been acknowledged on a conscious level. This leaves you unable to create a solid plan to resolve the problem, which creates the false impression that the issue is unsolvable. For this reason, all debt repayment plans should begin with a conscious weighing up of the principle amount. Facing up to the entire figure, whether through comprehensive digital tools or simply by pen and paper is the only way to eradicate denial and create a solid idea of how to approach repayment best. Creating a savings pocket that consists of at least 10% of your income is another initial step that is advised by most financial advisors because it prevents you from burying yourself in additional debt the moment emergency strikes. Once those two steps have been taken, there are a number of repayment strategies to choose from.

-1) The Snowball Strate

This is among the most advised tactics because it works on an emotional level to motivate debtors to continue working on their debt long term. It involves paying off the smallest debts first so that a higher number of debts can be eradicated as quickly as possible. This technique doesn’t necessarily offer the lowest total amount of interest, but for those who feel overwhelmed and helpless about their financial situation, it can lead to the best outcome.

-2) The Snowflake Tactic

Similar to the snowball approach, this method uses a priority list based on the smallest debts, as described by Time. However, instead of paying off debt once a month, several monthly payments are encouraged. Money saved or found during the month is automatically and immediately assigned to debt repayment. By paying off small amounts between salaries, you are continuously rewarded with results and better able to control your budget. This tactic also gives creditors an indication that you are working in a goal oriented way to eliminate your debt.

-3) The High Interest Approach

This approach is among the most financially sound of all strategies. Debts with high interest rates are paid off first so that the ultimate principle repayment is minimized. Debts will be paid off faster as long as motivation is not reliant on frequent successes. The process is made easier by consolidating debt and placing only minimum payments on low interest accounts. Instead, the latter amount can be placed in a high interest savings account to increase repayments on high interest debts. Debt counseling services can be used to strategize improved terms and fees.

-4) The Pragmatic Approach

The simplest and most practical way to eliminate debt is by minimizing expenses and maximizing income so that larger repayments can be made on a monthly basis. This becomes easier to achieve when every facet of your income is directly assigned to a particular payment. This is the harshest tactic, since it entails a new standard of living that may include taking on a part time job. For those who already have challenging work schedules and rudimentary budgets, a more comprehensive strategy is needed.

Image credits: http://www.flickr.com/photos/lendingmemo/11702964564/

Source: http://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/

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