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Eliminate Your Debt

Use this practical approach and expedite your paydown

When presented with multiple debts with varying interest rates and amounts, “analysis paralysis” has a tendency to take hold.  Leaving the debtor feeling helpless and possibly even depressed.  Often, the unfortunate result is our reluctant pushing off of the conversation to another less convenient day/week/month. All the while distracting ourselves with more of the same spending behaviors.

Along our path, the alluring appeal of “balance transfers” and “no interest charges until 20XX” reels us in, providing, in the short term, a false sense of security.  While these certainly can be part of a solution, until we have identified and learned to manage our habits, we are bound to repeat them. 

On many occasions, I have heard that the best way to pay down multiple debts is to “start-with-the-highest-interest-rate-debt first.” Sounds good!?! The inherent problem with this catch-all approach is that it completely omits behavioral psychology and fails to address our own inherent weaknesses.  In other words, this approach simply suggests “pay down the highest interest rate debt first, without regard to the amount of debt, even if it takes you five years.” Meanwhile, our other debts sit either idly or with minimum payment schedules.  The resultant irritation of prolonged payoff periods compounded alongside the loss of treating oneself at will heightens the probability of long-term failure.

Counterintuitively, I might propose a “pay-down-the-lowest-balance-card-first” approach.  This, regardless of comparative interest rates.  If, for example, we were able to reduce all of our other debts to minimum payment schedules and focus all of our excess reserves on the lowest balance, it is possible that, within a short time, we might have traversed several debt hurdles.  First debt is done.  Next, compound the payments from debt #1 to debt #2, while continuing to pay the minimum monthly amounts on our remaining debts. Followed by debt #2 payments toward debt #3.  Rinse, wash, repeat.  This rolling approach accomplishes two things: First, rather than being distracted by several debts simultaneously, it allows us to set our sights on a singular obtainable target.  Second, it puts in our immediate near term several possible accomplishments and resultant rewards.

Keep in mind that every situation is different.  Where possible, combining multiple approaches yields optimal results.  Take action, closely monitor your progress, and establish “reasonable” achievement rewards for yourself. Beyond the optimism you will feel from your progressive success, taking a breather and treating yourself with a small reward at different intervals will further foster positive momentum,  which begets more active engagement.  Believing in the possibility that your debts can be paid off in a reasonable timeframe, may also encourage us to seek out additional financial resources through additional cost-cutting.  Again, helping us to expedite our paydown timeframes. 

5 points:

1.     Prepare your budget: income/expenses

2.     Know the details of your debts.

3.     Use multiple strategies including focusing on low-balances first. 

4.     Focus and compound payments into payoff goals.

5.     At each expected payoff date, in advance, create a reasonable reward for yourself.

  • Rischi Paul Sharma