For many people, eliminating debt is truly one of life’s challenges. Unless you set about thinking hard and intensely want to get out of it, you will turn out living your life full of debts. So, how are you about to settle your debts? You may decide either one of the two methods:

The Snowball Approach

Dave Ramsey, a famous money person, introduced the concept of the “snowball approach.” It is listing all your debts to different institutions in places you have an account (credit cards, car loan, housing loan, multi-purpose loan, etc.) and then settling your smallest balance first. What you will do is to pay all the minimum balances needed by each of your account except the smallest one. And then, you aggressively pay off the smallest one and tackle the next smallest until you have paid everything.

The Avalanche Method

This technique is exactly the complete opposite of the Snowball Approach. In here, you are likely to actually start paying your most expensive balance together with the highest interest. This doesn't mean that the largest balance gets the highest interest you have to analyze and keep in mind the one that should be settled off first.

To illustrate, let us say you have three credit card balances. One is P1,000.00 with an interest rate of 1%; another is P8,000.00 with a 3.5% interest, and P10,000.00 with an interest rate of 1.5%. The first one that you need to repay is P8,000.00 due to compound interest. Once you have ridden off the balance along with the highest interest rate, you could possibly now go to the next with the highest interest rate i.e. P10,000.00 till you have repaid all of them.

The Best Thing to Do

So which approach is most effective for you? Mr. Ramsey said that it's not necessarily about math but a matter of behavior. If you are someone that needs a lot of motivation to pay off your financial troubles, then the snowball approach is perfect for you. However, when you are somebody who is driven to settle your debt, then use the avalanche method. High interest rates compound rapidly so it will require time just before getting out of debt.

Once you accomplished paying off a debt, reward yourself so you'll be motivated to go on. Buy your own gift or give yourself a break by having coffee with a friend. Once you are debt-free, start eliminating your credit cards while keeping the one that fits into your budget. Do not be enticed to acquire a new loan as this might lead you to a financial crisis again. Learn to say “No” to marketers who lure you to buy on credit. Teach yourself to be responsible and be reminded to stay out of debt.

Being debt-free, anybody can start saving on your emergency fund or open an account for the education of your children. You could perhaps think about investing in stocks or mutual funds. At Truly Rich Club, you'll find out how to stay financially free. Want to know how? Be a member now!

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