Welcome Guys! Do you have a combination of debt, and aren't sure where to start? It's time to start feeling less overwhelmed. Here are the 5 Steps to Start Paying Off your Debt.
Guys this is second part of the post " Want to Get Rid of your Debt? Read How? ". In the last part we have discussed how to save yourself from taking anykind of debt.
In this part I am going to give you five steps to payoff your Debt.
i) List your Debt according to increasing Interest Rate:-
The first step to payoff all your Debt is the listing of the Debt according to increasing Interest Rate.
After listing your Debt you are well known that what are the types of loan you have and how much EMI you have to pay monthly. First of all just pay the minimum EMI for every loan. After this there comes two methods to payoff.
a) Snowball Method:-
After paying the minimum EMI in this method you are going to payoff the loan which is less in amount irrespective of interest rate.
Loan 1 - Rs. 50,000 @ 10% p.a
Loan 2 - Rs. 1,500,000 @ 19% p.a
Loan 3 - Rs. 500,000 @ 24% p.a
In this method for the above scenario you are going to payoff the Loan 1 first then Loan 2 and at last Loan 3 irrespective of interest rate. This method will help you feel mentally good everytime you payoff any loan completely and keep you motivated to payoff the further loans.
b) High Interest Rate Method:-
After minimum EMI you are going to pay the loan which is having the more interest rate.
Loan 1 - Rs. 50,000 @ 10% p.a
Loan 2 - Rs. 1,500,000 @ 19% p.a
Loan 3 - Rs. 500,000 @ 24% p.a
In this method you are going to pay Loan 3 first then Loan 2 and at last Loan 1.
I personally prefer to pay you loan by High Interest Rate Method as in this method you are going to pay less amount as compared to Snowball Method. But if you are kindof person who cannot stick to long-term goals then for you Snowball Method will work good.
Tip:- If you are following High Interest Rate Method you might be facing a condition in which you are paying interest of your loan @30% p.a ( for credit cards ). In this case you should take a personal loan @19% and payoff your credit card loan, which will lead to a savings of 11% which is a great savings.
ii) Pay Incremental Gain Exponential:-
After paying the minimum EMI just attack on the loan with high interest rates. That is you are going to pay more for those loan which has higher interest rate. This will help you to save a lot of money.
Read the following chart carefully:-
Congratulations you are in the list of those 5% people of the world who knows the above method to payoff loans.
iii) Temprory Downsizing:-
Warren Buffett once said,
" If you buy things that you don't need then
you will have to sell things that you need. "
All of us spend a lot on such things that has no requirement or less requirement. These expenses may be:-
a) Gratification Expenses
b) Dineout Expenses
c) Entertainment Expenses
d) Unnecessary Monthly Subscription Services
e) Depreciating Assets
f) Non-Value Adding Objects
Keep in mind that you have to payoff your Debt and you will be able to save at least 30% of these above expenses and this money will help you a lot to payoff your Debt.
Remember you don't require Piece Of Finance you require Financial Peace.
iv) Payoff Your Loans With Second Income:-
There are the families in which both Husband and Wife earn then one's income should be completely devoted to payoff the loans.
If you are having more than one source of income then one source should be there only to payoff your loans.
v) Throw an Extra Cash on Your Debt:-
Last point but not the least. Sometimes you may got a bonus, you may win a bet or lottery, or any other source which gives you money without any plan. Instead of spending this money you should payoff your loans with this extra cash.
Tip:- You will have to plan that how you are going payoff your Debt.
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