With millions of people mired in debt problems, this malady is one of the largest challenges facing society at large. See, this situation is so widespread and endemic to society that the lack of free cash flow in personal budgets curtails consumer spending and investment. This then spills over into national GDP output, new business creation and makes tax revenue collection difficult. The disparity in income between the rich and the poor is continually growing in western societies so when you pile mountains of debt onto the middle and lower income demographics as well, it’s not a pretty picture. Not that western governments are a role model for fiscal conservatism, but at least the resolution of personal debt issues and avoidance of bankruptcy is within our control. So, here are a few approaches to digging out:
- Paying Down Highest Interest Debt First: Many people favor this approach since it chips away at the most costly debt first while continuing to pay lower interest rate debt. For instance, paying down a credit card at a 25% interest rate makes a heck of a lot more sense than pre-paying additional mortgage payments at 5%. If you consider elimination of debt as an “investment strategy”, wouldn’t you want to invest at 25% (guaranteed rate of return!) before you bothered with 5%? Sometimes though, the interest rates are pretty close together and the next option makes sense.
- Paying Down Smallest Outstanding Bills First: This is more of the “moral victory” approach. When one is inundated with 8 debt sources and the total debt amount seems staggering, by getting some quick wins, it puts you in a “winning” mindset. In this case, if there are a couple bills with only a few hundred dollars on them versus some other ones in the thousands, the goal would be to wipe out the smaller bills, get them off the list and get a sense of control over the situation as the total number of bills is reduced each month.
- Debt Consolidation: Debt consolidation is potentially the most simple and easiest to manage approach whereby one has all debts merged into a single payment with the benefits of fewer bills to manage and getting out from managing multiple due dates each month. As long as the interest rate is better than the existing high interest debt obligations, this option can help people chip away at their debt in a methodical, planned timetable as well.