Podcast: Play in new window | Download
The only way to have a positive net worth is to have more assets and savings than debt. The best way to build wealth is to swim without the ankle weights. There are a number of Debt Snowball methods that will help you get out of debt quicker!
Debt Elimination Strategies that work
Any one of these debt elimination plans will work if you work the plan:
- Debt Snowball: Pay extra on the debt with the smallest balance.
- Debt Avalanche: Pay extra on the debt with the highest interest rate.
- Risk Reduction: Pay extra on the debt with the most risk. This could be back taxes or a loan from your mother (you don’t want to risk the relationship, do you?)
Pros and cons:
- Debt Snowball: You pay more interest than the Debt Avalanche. However, getting a shot of QuickWin has been scientifically proven to keep people motivated to keep working the plan to the end.
- Debt Avalanche: You pay less interest overall. However, working on a 21% interest rate credit card for over a year tends to wear on a person’s psyche. We begin to believe the process doesn’t work and we quit.
- Risk Reduction: Taking care of IRS debt first eliminates the possibility of them garnishing your wages (no court process needed). Or you may decide to pay off your parents because the stress of the situation is eating away at you. These cases are not as common (most parents are a bit more forgiving than that) so the benefits aren’t as great as the Debt Snowball or Avalanche.
Arm yourself with reminders
When we were in debt I would get a punch in the gut every time a statement showed up in the mailbox. Constant reminders wear on us and we become more likely to quit.
It is important to stay focused and motivated in our moneyplan. We need to continue stretching every dollar and keep grasping at any opportunity to make more money to throw at our debt. Credit card companies benefit whenever we take our foot off the gas, so we must stick to the plan!
Arm yourself with tools to help keep you encouraged throughout the process. Smartphone apps like ReadyForZero send you reminders and encouraging messages. Progress thermometers on the refrigerator or bathroom mirror let you check in on your current status. Finding ways to pay attention will go a long way in your debt elimination process.
For example: I look at our mortgage balance a few times a month. Anytime I log onto our bank account to balance our checkbook, I see it. I look at our debt payoff spreadsheet once in a while, just to get my blood pumping. And, of course, I see the new balance at the first of every month after our payment is made. I’ve got my eye on the goal and focused on winning.
Above all else: DON’T QUIT
Evaluate your situation. Choose the method that works best for you. Above all things – DON’T QUIT! If you want to try one and then switch – go ahead. If the Debt Avalanche isn’t working for you then start attacking your smallest balance first. Everyone’s financial situation is different, so is their debt elimination strategy.
The bank has a plan for your money. It’s time to short-circuit that plan and start paying attention, not interest!
Also on this episode:
Holla From The Impala – It’s awesome to get paid
Congratulations to Rachel, winner of the Smart Money Smart Kids book giveaway
It’s so easy to just give up because it seems like you’ll never get out of debt, or achieve those goals. As a friend of mine said recently….progress, not perfection. Keep going at it, one step at a time, you’ll get there!
Very wise words my friend. I know you went the consolidation route with your unbelievable amount of credit card debt. If you had to do it all over again, which debt elimination strategy would you choose?
Another thing I do to keep motivated when debt-reduction progress is slow is to read the posts of other debt bloggers. There are definitely ups and downs to this journey, and it helps to get perspective by taking myself out of my own story and becoming engaged in someone else’s.
Fantastic idea Prudence. I know you read Enemy Of Debt, what other blogs do you read for encouragement?
Frugal Rules, like Enemy of Debt, features the posts of different debt bloggers. From these sources, I’ve chosen individual bloggers to follow – like Travis (above), The Frugal Farmer, and Club Thrifty. There is always something to learn from other people who are dealing with – or have already dealt with – their personal debt. Like you!
Nobody seems to consider the real pros here:
snowball – frees up cash flow faster, which ends up reducing risk of more need to borrow or even default on loans
risk-based – people forget that some loans are backed by collateral, and being underwater can be very risky if you need to sell or if your car gets totaled and have to pay the balance.
Agreed!
Great episode! It was the first one I listened to when I needed the extra motivation to start my goal towards financial freedom! Thank you Steve for your wise advices.
To keep my motivation high, I wanted to download the ReadyForZero app… Unfortunately, I wasn’t able to download it since I am in Canada… I am quite surprise by this limitation . If you have any other apps you can recommend to track my pay-off debts plan, that would be much appreciated.
Keep up the great work! My new motto is “Increase your net worth and not your credit score!” :o))
Great Asmaa!. Thank you.
I’m sorry you couldn’t get the app in Canada. They have an online version at ReadyForZero.com, would that suffice?