This generation cannot live without loans. Therefore, all of us trapped in a variety of loans. However, one must need commitment to come out of such loans easily with proper planning. There are two methods, which may help you in this regard. One is Debt Snowball Method and another is Debt Stacking Method. Let us see how these two popular methods help you in clearing your loans.
However, before proceeding to apply any one of these two popular methods, you must follow the below mentioned steps.
1) Stop to go for fresh loans
Once you made up of your mind, then the first priority is to stop going for new loans. Discuss the same with your family members. Stick to this decision. One-way if you plan for clearing all your loans, but at the same time looking for new loans means, you will never be out of loans.
I know it is difficult for few to take such hard decision. However, it is one of a major dieting; you have to practice to come out of a disease called LOAN
2) Spend less
This is second most important dieting you have to practice. If you spend more then from where you get a surplus to clear off your loans? Hence, it is must to track your spending and minimize as much as possible.
3) Earn more
Try to look for alternative ways to build other source of income. This will give you some flexibility and relieve you on depending one source of income. Understand your interest or expertise of field and try to search for ways to earn money in that field. Do this activity during your leisure time or during weekend. This makes sure that you not off from your main source of income.
4) Don’t Stop Investing
Clearing your loans do not mean stop investing for the major goals. You have to invest for goals like retirement or kids’ education and marriage. So never stay away or postpone your critical financial goals.
5) Be calm
Nothing will happen in a day or two. So be calm with a target of clearing your loans at the earliest. Never be in a hurry that you clear all loans within a few days. It never happens. Because, to make it happen, you have to receive huge lump sum or scarify your all expenses.
Now let us discuss about the methods of Snowball and Stacking.
1) Debt Snowball Method-The definition of this according to Wikipedia is, “The debt-snowball method is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first while paying the minimum on larger debts. Once the smallest debt is paid off, one proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later“.
The steps involved in this process are as below.
- List all your existing loan dues (principal amount) from smallest to highest. Do not concentrate on the interest rate of each loan.
- Pay the minimum payable amount to all loans. Do not skip this process.
- After paying all minimum dues, calculate yourself how much more you can pay.
- Pay the minimum balance and the additional amount to the lowest due loan.
- Once this small loan paid off, later add the additional amount and the earlier lowest loan’s minimum payment amount to pay the next lowest loan.
- Continue this process until you get rid of all the loans.
This process actually nothing but breaking your task into smaller pieces. It forces you to start with smallest task. The advantage of applying this method is you soon start to feel something better that you have fewer loans as the number of loans started to decrease. However, the disadvantage of applying this method is, it negates the consideration of interest as a criterion to clear off your loans. Because you are concentrating on lower principal loan, but what if the few other loans, which have high interest rate? You still pay the hefty EMIs to those loans and concentrate on lower interest and lower principal loan. One more disadvantage of this method is, it applies to those who have some enough cash after meeting the all loans minimum monthly payout. Otherwise, how can one clear off even the smallest loan?
Being few advantages and disadvantages of this method, Dave Ramsey, a staunch believer of the Debt Snowball method say that personal finance is “20 percent head knowledge and 80 percent behaviour”. Therefore, by experiencing quick results after adopting this process, one may clear off his loan at the earliest.
2) Debt Stacking Method-In this process, you concentrate on interest rates. I mean, you list down your loans based on higher interest rate loan to lowest interest loan. In this method once you stacked the highest interest rate loan to lowest interest rate loan, you concentrate to weed out of the highest interest rate loan. However, at the same time you practice to pay the minimum dues to rest of your loans.
So once the highest interest loan due was paid, then concentrate on the next and so on…until you fully out of any loans. The advantage of this method is, you are concentrating on highest interest loan. Therefore, a big relief once you come out of that loan. Hence, you feel that you saved a lot by being come out of that highest interest rate loan. However, the disadvantages are-What about the loans, which have a higher principal amount but low interest rate? You touch such loans later. Therefore, you continue to pay for long. Hence, results may prolong than expected.
Which is the best method?
According to me, a middle approach will work out. Notice that, in above two methods, one method only concentrates on principal and another only on interest part. However, a middle path, considering principal and interest will actually be worked out. In addition, to apply both the methods, you must have some surplus to start. Hence, the above said best practices of financial management must not be forgotten.
Hope this post will actually bring some cheer on their faces and force them to get rid of loans. Because to me all loans are BAD 🙂
courtesy of [iosphere] at FreeDigitalPhotos.net