HAVE you been in a situation where you have various debts, you do not know where to start, it takes a toll on your credit score and the debt feels like forever?
Sounds spine-chilling right? One might even think that this could be just a figment of someone’s imagination. But the bitter truth is, this affects millions and it exempts no one.
There are two known strategies that anyone can apply in achieving a debt-free status. But what I would be focusing on is a strategy that fits perfectly in a scenario where an individual lacks motivation, the right attitude and behavior. This strategy is called the debt snowball strategy.
The important matter to focus is how your behavior toward debt can be modified through the use of snowball strategy. In fact, being able to master this strategy gives you that sheer motivation, the right attitude and behavior toward debt that enables you to be eligible to apply both strategies at the same time, which is inarguably far more effective and efficient in regaining financial freedom.
Carefully follow these life-changing money makeover steps to successfully apply the debt snowball strategy.
- Create a list of your debts with its corresponding total payoff and the minimum payments for each debt. Arrange them in the order from smallest to largest being #1 the smallest.
Let’s say your first debt is going to be your credit-card debt amounting to a principal of P2,100 with 2.5-percent interest and a P250 monthly due for 12 months. Second would be your cell-phone debt with a principal amount of P8,400 with zero-percent interest payable in equal six months. Third would be your laptop debt with a sales price of P39,600 payable in 36 months with 4-percent annual interest and a monthly due of 1,250.
Last, your fourth item on the list would be your down payment for a condominium amounting to P150,000 payable in 60 months with zero-percent due with equal monthly payments of P2,500.
- Comply the minimum payments on all debts except for the smallest amount.
If possible pay the smallest debt immediately in two to four months’ time and once done, carry over the minimum payment amount for the first debt to the next debt on the list combined with the agreed value to pay on your first debt. Following a more lenient approach which is the average of the range given, you need to set aside P6,150 (P750 + P250 + P1,400 + P1,250 + P2,500) for a three-month first debt-payoff plan.
Please take note that if there is a need to tighten your belt, you must not hesitate to do so. The larger disposable money you have, the faster you become debt free.
- Consistently following the method above, you would be able to pay your credit card in three months’ time and clear your cell-phone debt on the fifth month with a surplus of P600, saving you interest worth seven months, which can immediately be applied for your laptop debt increasing its pay off ability to P1,850 (P1250 + P600). On the sixth month, two debts are cleared plus your payoff ability for the third debt jumps to P3,650 (P1,000 + P1,400 + P1,250).
- Should you choose to consistently follow the momentum on the seventh month, you would be able to pay off your laptop debt in nine months’ time, which is roughly 20 months earlier from your original schedule of three years.
The same goes for the largest debt which is the down payment for the condominium. On the 16th month where you would be able to clear three of your debts, your new payoff ability would be P6,150 and would make you 25 months earlier from your five-year loan on a preselling condominium.
It is evident that there are no magic tricks to this strategy and it does not need someone to be a maven on math.
The unique catch of this strategy is to create a positive momentum of behavior modification to be consistent, persistent and focused. The problem with focusing first on huge debts is it kick-starts a negative mental drive of losing your incitement to pay.
Hence, starting with small debts where you see progress gives you the motivation to finish it all the way and ultimately become debt free.
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Earl Pagatpat is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 71st RFP program this August 2018. To inquire, e-mail info@rfp.ph or text <name><e-mail><RFP> at 0917-9689774.
