With digitalization, our expenditures are gradually becoming overwhelming. Since everything is just a click or an app away, overspending has become a way of life instead of a luxury. In fact, for some people, the accumulated due amount on their credit cards is more than the amount they have in their emergency funds. We often end up overlooking the small expenditures, which add up and become huge after one point. These habits eventually lead to a massive debt load and immense pressure. So, what is the solution? The solution is debt management techniques!
But what are debt management techniques, and how do they work?
We have talked about financial literacy and how only a small section of Indian society is acquainted with it. It is one of the reasons why people do not have any knowledge about debt management methods. Even though these are some of the basics of financial management, people often do not know about debt management. We are here to help you understand what debt management is and which method can help you.
What is debt management?
Debt management is a technique or strategy that helps a debtor handle and efficiently repay his/ her debts. Generally, debt management techniques vary as per individual situation and debt load. There are two standard and widely used methods that work for almost everyone. Many people also try a combination of both to pay off their debts.
Which are these methods, and why are they used?
Accept it or not, paying off debt turns out to be a difficult task when you get to it. One requires a plan and financial discipline to get over the hurdle called debt. There are two widely used methods, namely snowball, and avalanche. In a nutshell, they more or less are similar. Both of these methods require paying off one debt at a time while paying the minimum due for the rest. Let us have a look at both ways with an example:
Let us say you have the following debts, interest rates, and minimum due:
Credit Card 1: INR 85,000 with an interest rate of 32% and minimum due of INR 4,250
Credit Card 2: INR 25,000 with an interest rate of 21% and minimum due of INR 1,250
Personal Loan: INR 2,00,000 with interest rate of 12% and a minimum amount of INR 9,461
Credit Card 3: INR 49,000 with interest rate 43% and minimum due of INR 2,150
Now, let us say you keep INR 22,000 aside to pay off your debt every month.
As the name suggests, the snowball method exactly works like a snowball when thrown downhill. It becomes more significant and faster as it goes down the slope. Similarly, in the snowball method, you start paying off the smallest debt first, and it rolls down quickly, and then you move on to the next one.
With the snowball method, you are supposed to pay the debt with the lowest amount first and pay the minimum amount due on the rest of the obligations. As per our example, you should pay Credit Card 2 first, which is INR 25,000.
Start with paying minimum due for all other debts except Credit Card 2. Minimum payments for Credit Card 1, Credit Card 3, and Personal Loan would cost you INR 15,861. You will have INR 6,139 every month, which you would pay toward your Credit Card 2. This way, you would be able to pay off the debt for Credit Card 2 in four to six months. After this, you will move on to the next lowest payment for Credit Card 3 and so on.
The debt avalanche method works like an avalanche, it takes time, but it also helps you finish off your highest interest debt. In short, you end up saving some time and money when you use the avalanche method to pay off your debt. Now, let us check out how it works!
We’ll take the same example, but this time, you would pay off the debt with the highest interest rate first. So, you would begin with Credit card 3. In this case, you would pay the minimum due of Credit Card 1, Credit Card 2, and Personal Loan, which would cost you INR 14,961. You will have INR 7,039, which you will pay toward Credit Card 3. It will help you pay off your first debt in seven to twelve months. Once you finish it, you can move on to Credit Card 1 and so.
Now, the question is which one is better for you?
Generally, Avalanche method helps you pay off your debts slightly faster, but it has initial hiccups staying motivated as the first debt takes more time to clear up. If you are encouraged by small and quick results, we would recommend going with the Snowball method. otherwise, the Avalanche method works for everyone if you are slightly patient and work toward a bigger goal to pay less interest rate and pay off your debts faster. But this is not it; you don’t have to stick to just one method; you can change the way in between and pay off as per your convenience. As we said, every situation is unique. You can use a combination of both and clear up your debt faster. The choice is yours!
If these solutions are not working for you, you can always get in touch with us at 01246663666 or go to our website, fill the form to request a callback. Our trained debt counsellors can guide you through the process of debt settlement. You can understand and decide if debt settlement is right for you and decide for yourself.