There are three known methods of debt reduction, with the most famous two named as the debt snowball and the highest interest rate first. The last one, which has been existing for a long time but dubbed only recently in the blog âMan vs. Debtâ, is known as the Debt Tsunami.
The author had a very beautiful explanation of this strong and appealing name. He compared the approach to the powerful natural disaster, because the debt tsunami method has a strong potential. Like the initial small waves of tsunami that are almost undetectable in the deep waters, your beginning efforts of debt payment may be futile at first. But just like a tsunami that becomes more powerful as the water becomes shallow, your efforts will start to become significant as your debt becomes smaller.
The main principle of the debt tsunami method is to use your emotions to create that primal burst of energy in facing your debt, and to get rid of them. That said, the debt tsunami follows the approach of paying off debts in order of their emotional impact in one’s life.
Let’s put a scenario to explain things more clearly. For example, you have an existing credit card debt worth Â£150 at 20% interest, a Â£50 debt at 10%, and a debt from a close friend also worth Â£50.
If you are following the debt snowball, you would pay off the smallest debt first regardless of the interest. In this case, however, since you have two Â£50 debt, you need to consider the interest, so you would pay off the one with the 10% interest first. The next you would pay is the loan from a friend, and last is the Â£150 debt.
On the other hand, if you are a believer of the highest interest rate first, you would try to eliminate first the Â£150 debt, since this one would save you more costs from interest. You would then pay off the one with 10% interest, and the loan from a friend last, since this one doesn’t have any interest in it.
But if you are a supporter of the debt tsunami, and emotions are highly important to you, you would first pay the loan from a friend, since this one has the highest emotional burden to you. Even though your friend doesn’t really hunt you for payment and there’s no interest involved, you would pay off this debt first because you are worried that there might be tensions between you.
Because of the flexibility of the debt tsunami method, it is often criticized. Many people believe in following a well devised plan, and not just âfeelâ something about your debts and choose which one to pay first based on these emotions. However, for some people, these feelings couldn’t be denied, and emotions play an important role in order for them to make the plan work.
In reality, it doesn’t really matter which method you follow, or whether you want to follow others’ footsteps. What matters is that you get started, and once you do, you need to stick to it.