This is how you get rid of debt effectively


Do you want to get rid of debt in the shortest possible time? Read the experts' advice to get control of your finances.


In Norway, we have sky-high debt. We owe close to NOK 3,602 billion to the banks according to E24. This is primarily due to the fact that very many Norwegians own their own homes, which often means mortgages. It also does not help that it is becoming increasingly expensive to buy a home. There are also plenty of advertisements around us about consumer loans, whether you are going to have a new kitchen or just want to escape the rain and the cold a bit. We owe over NOK 102 billion in consumer loans alone, with a growth of 13.2%!


Repayment


Despite more expensive housing, sky-high debt to banks and consumer loans, we also have high wage growth. Many also inherit or receive monetary gifts from family / friends. It makes it possible to pay down debt faster than planned.

The most important thing when we talk about debt repayment is to pay the most expensive debt as quickly as possible. Many people are preoccupied with equity funds, IPS and ASK, but it is not so important until the most expensive debt has been paid. However, this is often not always as easy to do in practice as in theory. So how do you get rid of debt effectively?


The avalanche method


Finance expert Hallgeir Kvadsheim talks about two "methods" when repaying debt. The first method is called the Avalanche Method. It looks like this:

1. Credit card debt

2. Consumer loans

3. Cheap loans

4. Mortgages

5. The student loan


This method is very often recommended by consumer economists on the basis that it provides the lowest possible interest expenses - well and good if you follow plans.



The pragmatist


This method consists of economists who like to have a more pragmatic (not surprising) attitude to the problem. The thought is then: "What really works best in the long run? What motivates people the most on the road to becoming debt free?"



In December 2016, Remi Trudel published an article in the Harvard Business Review. The team he analyzed debt repayments for thousands of credit card holders. They found that those who paid down one card at a time, and started with the least first, paid down the debt the fastest. This method is also called the Snowball method.



How to apply the snowball method to get rid of debt


The following example is taken directly from https://www.dinepenger.no/penger/guide-fra-hallgeir-kvadsheim-bli-kvitt-gjelden-raskest-mulig/24543374:


Example: Let's say you have three loans with high interest rates. You have 5,000 kroner that you can pay down the debt on each month.


Credit card 1: NOK 50,000 30% interest my amount: NOK 1,000

Credit card 2: NOK 25,000 25% interest my amount: NOK 500

Consumer loan 1: NOK 35,000 15% interest min amount NOK 750


The rational would pay the minimum amounts, a total of NOK 1250, on the two loans with the lowest interest rate, and the rest, NOK 3750 on the most expensive card. It would take a year and a half to get rid of the first, most expensive loan.


2. Another alternative is of course to distribute the money flat, ie NOK 1667 on each card, but this does not trigger either the most rational or the motivation very much.


If you want to follow Remi Trudel's research, you should rather pay the minimum amount, a total of NOK 1,750, on the two largest loans. The rest of the money, NOK 3,250, should go to the smallest card. Thus, you get rid of the smallest loan already after 7-8 months. Then you only have two loans left and can now boost the repayment to NOK 4,000 on the second largest. You increase the speed, it increases the motivation. Vips, 9-10 months later you also get rid of this card.



The small victories


Tudel calls it "the power of small wins". So what do people choose: Snowball or avalanche? In fact, none of the parts! A larger study of 1.4 million credit card holders in England showed that the most commonly used method was what researchers called "balance-matching": we adjust the monthly amount to the balance of each individual card or loan. So if you have 5,000 kroner every month, you would pay just under 2,500 on the largest loan and the rest divided approximately 50/50 on the two smallest.


*This post is based on Hallgeir Kvadsheim's article: Guide from Hallgeir Kvadsheim: Get rid of debt as soon as possible. Examples in the text are taken from the same article: https://www.dinepenger.no/penger/guide-fra-hallgeir-kvadsheim-bli-kvitt-gjelden-raskest-mulig/24543374


Other sources: https://e24.no/makro-og-politikk/rentemoete-norges-bank/nordmenns-gjeld-har-oekt-med-1-259-milliarder-siden-forrige-rentehopp-vi-er-mer-saarbare-enn-foer/24444418


https://e24.no/boers-og-finans/forbrukslaan/kraftig-vekst-i-forbrukslaan-i-fjor/24283036



- By Veronica Nesvik, Customer Manager at Noon Invest