Monday, October 21, 2019
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Two Ways to Eliminate Debts

Ending debt is very important, because having debts prevents us from growing our wealth and increasing our wealth , so eliminating debts should be a priority objective in the management of our money.

When we have debts

debts

The most logical way to end them is to start with the one with the highest interest rate. This is what most personal finance gurus recommend. In this way, by paying the debts with the highest rates, we will pay less interest. It is the best form according to mathematics.

However, as we have said on more occasions, personal finances have more personal than finance in many cases, and in the way of eliminating debts psychology can influence more than mathematics in the success of ending debts.

The way to pay debts by ordering them from less to more money owed and starting to pay the one with less amount, is better from the psychological point of view as it reinforces and motivates us to see results in less time, than the other way, Better from a financial point of view.

Two Examples of How to Pay Debts

Two Examples of How to Pay Debts

Imagine a person who has these debts with these interest rates:

  • 3,000 euros for a 5% master
  • 10,000 euros of a 10% personal loan
  • 8,000 euros of unpaid card balance at 12%
  • 7,000 euros for an 8% car

The order from a financial point of view would be:

The order from a financial point of view would be:

  • 8,000 euros of unpaid card balance at 12%
  • 10,000 euros of a 10% personal loan
  • 7,000 euros for an 8% car
  • 3,000 euros for a 5% master

This is the most efficient way , as long as you have sufficient willpower. Paying the debt with the highest interest rate first, in the long term you will pay less, because less interest will occur. However this does not work for everyone .

In many cases the debt with the highest interest rate coincides with the debt with the highest amount or one of the highest, so you can spend many months paying the debt without seeing significant progress, this ends up undermining the moral and the motivation and finally the debt is stopped paying.

One way to solve this is to sort the debts according to the amount of money and pay them from less to more. In the case of the example it would be like this:

  • 3,000 euros for a 5% master
  • 7,000 euros for an 8% car
  • 8,000 euros of unpaid card balance at 12%
  • 10,000 euros of a 10% personal loan

In this way , the smallest debt is finished first in less time and this produces psychological reinforcement and greater motivation . What will make us end the debts.

Once ordered, pay the minimum necessary in all debts and each euro you can save, dedicate it to the smallest debt, once eliminated go to the next one and so on until all debts are eliminated .

When we want to end our debts the most important thing is precisely that, to pay the debts. The order in which it is done, no matter, even if it is an incorrect order from a financial point of view, the important thing is to eliminate debts .

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