How to Manage Money When Drowning in Debts

By ketkih | August 1, 2015

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Jordan from the movie ‘Wolf of Wall’ Street made a lot of money but he fell just as hard and fast and couldn’t get out of the debt he found himself in.

Debt is not a good place to find yourself in but you don’t have to end up drowning in them.  Here’s Jack, a 30 year old IT professional, who found himself in such a situation but was eventually able to pull himself.

All was going well with Jack, a typical fast paced young professional, until he decided to leave his full time job to don the hat of an entrepreneur. He started a web based company and invested a good amount in it by taking a business loan. But things didn’t work out as he expected.

Jack realized too late that he had fallen into a debt trap. His installment outflow had exceeded his income.

The bank refused extend holiday periods and give him relaxed payments options. He further got into multiple small debts, including borrowing from friends and family.

Jack finally sought out financial advice and was asked is to wind up the company and re-join a full time job. Now he gets some regular income and with this he could plan some strategies as below:

The Debt Snowball Method

In this method, Jack was advised to start by paying off the smallest loans first and the minimum amounts on larger debts. Closing the smaller debts gives him some peace of mind. He can slowly proceed to the next slightly larger debt, and so on and gradually to the larger ones.

To achieve this, he should first list out all his existing loans from smallest to highest (in value and not in interest rate).

Rather than concentrating one or two loans, by paying minimums on different loans would reduce the load on him when looking at the bigger picture. This process is like sizing down your food into bite sized pieces. By following this process, he can slowly get out of all the loans.

Stacking of Debts

In the first method, he was concentrating on loans with lesser principal amount. Here, his concentration will be on the ones on which he has to pay higher interest.

He lists down the loans based on their interest rates, from the loan with the highest interest to the lowest, and concentrates on bringing down the top ones in the list first. Since he is only building up his income, the practice of paying the minimum dues can be applied here too.

So once the highest interest loan is partly paid, he can concentrate on the next and so on. As he is concentrating on the ones with the highest interest ones here, he lowers his debt faster. But as he has multiple loans, he may take time to get out of the entanglements, although he is saving some money in this option.

Which is the best method?

Both are very different approaches to get out of a drowning situation.

With the support of a good friend, Jack also made the best use of his available resources, like selling of an ancestral property to get some money. His family supported him as well. The first floor of their two storied parental house was rented out to raise some passive income, which he could use to clear his debts.

There are a number of options which we can rely upon to regain control of our lost finances. The best solution will depend on your circumstances. But every little effort will be worth it.

It may take years of hard work and diligence to reach a debt free destination, but a slow and patient rowing through the hard times is the first step to get rich slowly.

The Wolf of Wall Street way is probably not the best way to go if you want to get rich.

 

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