How to Pay Off Debt
My perspective is largely based on the things I’ve learned from 34 years of professional finance experience, along with trial and error from the school of hard knocks. I would love having middle-aged sage/seasoned James to counsel 30-year-old newly married James who was trying to figure things out. I qualify that by saying, through it all I’ve been abundantly blessed. However, for those not seeking to take the long way, my debt payoff strategy will make your life better.
In the interest of time, it’s not necessary to break down the latest Forbes mathematical analysis. We will discuss real life strategies I’ve witnessed that work well, and those that don’t. Did you know personal finance is 80% behavior and only 20% head knowledge? Yes, it is true! We know there are a lot of resources out there that will tell you to pay off either your largest debt or the one with the highest interest rate first. While that makes sense mathematically, paying off debt is more about motivation than it is about the numbers. (That’s pretty funny coming from a numbers guy like me...lol). In all honesty, hope has a lot more to do with winning with money than math does.
Let’s retreat to cover some basics. First of all, we are mostly addressing revolving debt (credit cards) because of all types of debt, I view it as the biggest, most damaging, and most un-necessary of all. It’s primarily the culprit of “debt prison”, the rates are crazy high, and frankly it’s not a good use of money. Most often when I’m helping someone with credit problems, revolving debt is the main reason. So, for anyone looking for credit repair, start there. According to the Federal Reserve, credit card balances stand at $848 billion. That means the U.S. as a collective has an insane amount of credit card debt.
Steer clear of debt reduction program and plans. They are advertised all over the place. Luckily, I’ve never personally been duped on one, but I’ve had to help a lot of people who have. Debt settlement companies are the seedy underbelly of the financial world. Run from this option. Companies will charge you a fee and then promise to negotiate with your creditors to reduce what you owe. Usually, they just take your money and leave you responsible for your debt. I despise the damage these companies have done to so many people. Can you say scam? Debt consolidation programs have more legitimacy, but they’re still not my preferred way. This is basically a loan that combines all your debts into one single payment. This sounds like a good idea until you discover that the lifespans of your loans extend, meaning you’ll stay in debt longer. Also, the low interest rate that looked so appealing at first usually goes up over time.
My preferred debt payoff strategy is the snowball method, because as stated earlier, paying off debt is more about motivation than it is about numbers. I don’t think it can be overstated.
But first things first: It’s time to get on a budget (that alone puts you ahead of 78% of the population). Anyone that knows me well, especially my kids and wife will tell you that I strongly believe in the benefit of having a plan! Heck, when my kids come back in town to visit, in order to maximize our time together, I organized Itineraries for them…funny but true, and it works. I also believe in Warren Buffet’s quote, “An idiot with a plan can beat a genius without a plan.” Remember, you won’t ever get ahead if you’re spending more than you’re making each month. In order to start winning with money, you have to start telling every single dollar where you want it to go.
The debt snowball plan is a strategy to pay off debts in order of smallest balance to the largest balance, one by one. You want to aggressively pay off the smallest debt first, while making minimum payments on the others, then move to the next and so forth. Paying off credit card debt by starting with the smallest balance will help your see progress early on. And that progress will fuel your motivation to pay off all your credit cards! Before you know it, your debt will be greatly reduced, which automatically brings your credit score up, and improve your financial health! Follow this strategy and you will master your finances, by controlling your debt. Congratulations, you’re a financial winner!
James Holmes
President, Black Lion, Inc.