In my previous blog I shared some of the things that one can start doing in order to start their journey to debt freedom. It is not an impossible mission, no matter where you find yourself. The important thing as they say is to just start. Now that you have your debt schedule ready and have decided how much you can afford to put as a top up to your regular monthly repayment, you are good to go.
There are generally 2 ways that you could use to pay off the debt namely the avalanche method or the snowball method. There is no hard and fast rule on which one is best but choose the one that suits your personal psyche better.
Example of a debt schedule
|Amount Owing||Monthly Repayment||Term||Interest Rate|
|Foschini||R3 000||R150||24 months||21%|
|Game||R8 000||R300||48 months||24%|
|Capitec personal loan||R50 000||R1 000||60 months||18%|
|FNB Credit Card||R20 000||R380||60 months||16%|
|Wesbank Car Loan||R150 000||R2500||72 months||10%|
* These values are hypothetical and for illustrative purposes only
The Avalanche Method
This method appeals to the person who is methodical and prefers to apply logic. Interest is the cost of borrowing thus, it would make the most sense to this individual to pay off the most expensive debt as measured by the cost of borrowing. While paying the minimum on all the debts but the most expensive one, you would make a commitment to pay off the Game loan first. After doing the budge, if you can spare an extra R300 each month by the change in lifestyle, then you would add this R300 to the monthly repayment of R300 making the new repayment R600. You will now be able to repay this loan in 14 months rather than 48. After paying this off, give yourself a tap on the shoulder and in the following month, move on to the next most expensive debt which from the schedule above would be Foschini. But instead of paying R150 you would now have R750 and this would allow you to pay off this debt 2 months after finishing the Game one. You would then move on to the next most expensive debt which is Capitec and so on until you become debt free!
The Snowball Method
If you are someone who enjoys results and feels motivated by short term wins or instant gratification, then this method is best suited for you. Using the debt schedule above as an example, you would make a commitment to continue paying the minimum repayment for all the debts except the one with the smallest value for which you would commit to start paying a little extra into. In our example above, this would be the Foschini one. If from budget you can spare an extra R300 each month by the change in lifestyle, then you would then add this R300 to the monthly repayment of R150 making the new repayment R450. By making this adjustment, you will now be able to repay this loan in 7 months rather than 24. After paying doing your this off, give yourself a tap on the shoulder and in the following month, allow yourself to indulge in at least one luxury worth the R450 you would have paid Foschini. In the 8th month reward yourself! However, in month 9 we need to get back on track and start paying a little extra to the debt with the least balance outstanding and in the example above this would be the Game loan. You now take the extra R450 that you now have and top up the usual R300 making it R750. By doing this, you will be able to pay off this loan after only 17 months instead of 48. If you keep doing this for each debt making sure you use the additional funds to clear the next smallest debt, you will achieve the goal of being debt free!