After the events of the 2020 pandemic, people are starting to feel the effects of the lockdown on their finances. Unsettled debts have doubled compared to pre-pandemic numbers. People have a hard time settling their debts due to loss of income during the lockdown or the loss of their work. If you are having trouble paying your debts, I have compiled three debt payment strategies to help you get out of debt.
DEBT PAYMENT STRATEGIES
Made famous by Dave Ramsey, the DEBT SNOWBALL is the easiest debt reduction strategy among the three. It is also the most straightforward strategy making this strategy the easiest to complete. This method has the highest success rate because of its simplicity, and it considers emotions in its approach.
DEBT SNOWBALL requires you to pay off the LOWEST DEBT FIRST and pay the minimum payment on the rest of the remaining debts. It is straightforward and does not need any complex calculations. The strategy focuses on baby steps to achieve your end goal of becoming debt-free. It also focuses on small baby steps achievement to motivate you to continue and stick to your plan.
DEBT AVALANCHE is a payment strategy that focuses on paying off the highest interest first. It is based on the idea of eliminating the costliest debt first to minimize interest payment.
The strategy requires the debtor to pay the minimum payment on all the debts and pay extra funds on THE HIGHEST INTEREST. Once the highest interest is paid off, the debtor moves to the remaining highest interest until all of the debt is eliminated.
This strategy if the fastest way to pay off your debt, but you won't see any results for a long time. Unlike DEBT SNOWBALL, DEBT AVALANCHE does not consider the value of small victories in your journey to being debt-free. It does not take into consideration the emotional motivation one gets when you successfully eliminate one debt. It focuses instead on the final result to get out of debt the fastest and cheapest way possible.
The DEBT AVALANCHE is suited for people who have the discipline to stay the course no matter what happens and control their emotions. Dave Ramsey does not recommend this strategy to people who are already drowning in debt since it is the lack of discipline and control which put these people in a lot of debt in the first place.
Done On Last Payment (DOLP)
Done On Last Payment or DOLP is a debt payment strategy created by David Bach. The system requires a bit of calculation to devise a plan to organize which debt to pay first. The process tries to pay off the debt that has the shortest term.
Among the three strategies, DOLP requires a bit more effort since much data needs to be gathered before proceeding with this strategy. The process does not focus on interest rates or the total amount of debt. It concentrates instead on paying off the debt that has the shortest duration.
The data needed in using the DOLP strategy are the OUTSTANDING BALANCE of each loan and the MINIMUM PAYMENT of each loan. Once you gather all of your debt data, you then calculate the DOLP number of each debt.
DOLP NUMBER = OUTSTANDING BALANCE / MINIMUM PAYMENT
You then arrange each debt from the lowest DOLP NUMBER to the highest DOLP NUMBER. You pay the minimum payment for all your debts and then pay the extra funds to the lowest DOLP NUMBER. This strategy focuses on paying off the lowest DOLP NUMBER first.
To understand this strategy, the DOLP NUMBER is technically the ranking of the number of months you will be able to repay a particular debt.
This strategy is sound if your debt is still manageable, but you will have problems with this strategy if you have several unsettled debts. The debt's unpaid balance will skew the minimum payment since the outstanding balance will accumulate with the current balance. With the current situation, many people have unsettled balances accumulated during the lockdown period. Unless all of your debts are up to date, I wouldn't suggest using the DOLP strategy to resolve your debt problems.
Choosing which method to adapt in paying off your debt is like choosing a diet plan. Pick the strategy that you know you can stick to. Don't be too ambitious in choosing a strategy that you know you won't be able to finish.
As for me, I have tried using both the DEBT SNOWBALL and DEBT AVALANCHE before. I started with DEBT AVALANCHE and was discouraged a couple of months after since I felt that my effort was not working. I was receiving the same bills each month after my efforts had a psychological effect on me. After reading Dave Ramsey's book Total Money Makeover I used the DEBT SNOWBALL strategy and successfully eliminated all of my debt in less than two years. I am currently in the same dilemma after the lockdown, and I am using the DEBT SNOWBALL again to eliminate the debt I accumulated during the lockdown. No matter which strategy you prefer, what is essential is you stick to