Unless you have been living under a rock and chanced upon this blog before reading the news, you would have read about Reliance Jio and how the spree of investments and rights issue for Reliance a have made Reliance Industries debt free. I am personally in awe of the audacious goal the company had announced to cut down a whopping 21 billion dollar debt in less than a year. Am sure the background work would have started much prior to such a proclamation but it is an extremely impressive feat that the company has accomplished.
While private equity firms won’t help us out with our debt, the principle of becoming debt free is something that we can all adopt in our lives. It seems our economy is almost running on the fact that most consumers are using debt to finance their purchases. House loans, Car loans, Phone loans, Personal loans and on and on!
But for those who are already in debt, getting out of it seems daunting. In fact, you might feel like you will never get out of the EMI trap. But that’s not true. Getting out of debt just needs a shift in mindset, and some focus!!
There are two key approaches to tackling debt - Debt Snowball and Debt Avalanche
What is Debt Snowball?
In this approach, you start off with the smallest outstanding loan that you have. Say a phone loan, you pay it off first. Followed by your car loan etc etc. This may not be the most efficient way from a interest paid point of view. But this approach cures debt from an emotional point of view. This approach is useful as it keeps building confidence as your milestones of paying off individual debts comes along sooner. Think of it as a motivational program to help you get off your debt
What is Debt Avalanche?
Line up all your debt payments and pay off the ones with the highest interest rate first. The idea here is try to make your debt repayment is more efficient from a total interest paid point of view. This approach will save money in the longer run.
So which approach is better?
To be honest, both are good. One tackles the problem of debt logically and the other tackles debt motivationally. It all depends on what sort of approach you apply in life personally. Are you the type of person who has patience to wait for the long run or do you prefer to have wins along the way to help keep you going? Choose one that adheres to your personal values. Be sure to first sort out your emergency funds first before you start tackling your debt.