We had a discussion among officemates about the best way to get out of bad debt. There are a couple of principles that could work for you.

First, as a preparation, list all your bad debts. Indicate the loan balance, the interest rate and the number of months you expect to pay off the debt.

Here now are three strategies when paying off bad debts. The first is practical/mathematical, the second is … psychological and good for the ego. And the third is a way to accelerate debt-payments.

Pay-off the most expensive loan

In this school of thought, the idea is to pay-off earliest the loan that is costing most money in interest payments.

For example, which of these loans should you pay first?:

a.) Php 10,000 debt to the credit card company at 3% per month
b.) Php 10,000 soft-loan from your mommy which you can pay when you can (in essence, 0% interest)

Answer: Pay-off the (a) Php10,000 debt to the credit card to avoid additional interest. (a) is a more expensive loan because it costs you more if you delay paying the credit card debt.

Pay-off the smallest loan earliest

The idea here is to “conquer” the easiest (debt) mountain first, and conquer the progressively bigger debt mountains.

This has a psychological effect building courage for the payor. Very soon, the payer will be able to say: “Wahoo, I’ve paid of one debt! 9 more to go!”

On the other hand, if the payer postponed payment of the small debt and aimed for the big debt, it will take him many more months before he can finally say “Wahoo!” and by that time, his ego might have given in to the psychological burden of debt, feeling as if the debts are insurmountable.

Note that this strategy is most effective when used together with the next strategy…

The Debt Eliminator

In essence, when one loan is paid off, the monthly debt-payment allotment should be used to pay for the next shortest loan.

When you have multiple loans, you will need to allot a monthly debt-payment budget for each of the loans. For example, you’ve allotted P2,000 to pay of a credit card loan within three months. You allot P3,000 more to pay for other debts.

On the fourth month when you’ve paid off the credit card loan, do not relax and start spending the “extra” P2,000 that you’ve previously alloted each month for debt-payment of the credit card loan. Instead, maintain your previous lifestyle and use the “extra” P2,000 to pay for the next loan. Thus, you effectively pay off the next loan earlier!

Keep on going in this manner and you’ll be out of multiple bad debts in no time!

This Debt Eliminator strategy is discussed in more detail in the book “The Four Laws of Debt Free Prosperity” by Blaine Harris and Charles Coonradt. It’s a good read written in story-format with good examples. 

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debt sentence no more

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