A Smart Way to Pare Debt

Now in February, we look at the New Year’s resolutions we hoped to keep. One of the most common, cutting debt, is very difficult. But you can do it if you have a plan: Pay off the debts with the largest interest rates.

Debt reduction is a lot like weight reduction, the other big New Year’s resolution. I have experience with both. Believe it or not, they have amazing similarities in terms of behavior patterns and success stories.

When people go on a diet, they typically dive right in.  Success comes quickly but then begins to wane. Eventually, our old habits resume. When people try to get out of debt they tend to do it with the same attack plan as when dieting.

Generally, they have debt in more than one place  – credit cards, a car or two, a house, etc. The burden of looking at your financial affairs is like looking at your body in a full-length mirror right after a holiday feast. You enjoyed the meal, but now come the regret and the feeling of hopelessness.

You are tempted to give up. You say: “This is it. I am done forever.”  After all, you have other, more immediate, matters to worry about in your life. But understand that all great generals lost a battle or two on the way to winning the war. We must be diligent, determined and yet dialed into life enough that we can emotionally deal with things out of our control.

So here’s the battle plan. I have used it personally, taught it to numerous groups including my senior class at Purdue and have seen it flat-out work.

Make two lists of your debts, side by side. On one side, list the lowest balance down to the highest. On the second list, record the highest interest rate down to the lowest. A big part budget reduction is simply facing the facts. We often make above the minimum payment on everything, which feels good in the moment but never gets us anywhere near a meaningful decrease of our overall debt load.

Find the common debt near the top of the page in each of the two lists. Perhaps you owe $600 on a credit card that is your second lowest balance. But it is at 21% and at the top of the interest rate list. Make the minimum payment on everything else and attack that item.

Being in debt holds us captive. There are too many decisions to make about what to pay off, when and how. This is hard on the soul and on families alike. You need a victory. You can pour all your excess cash into that payment until it is gone like dust in the wind. Success!

You can achieve success after success by following this plan of attacking the debt with the highest rates. Eventually, you are debt free. It won’t come overnight.  You will have bills and challenges that pop up but now you have a battle plan. If you results motivated you, follow this method. You can succeed.

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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC.   Big Joe can be reached at bigjoe@yourlifeafterwork.comor (765) 640-1524. Follow him on Twitter at @Big Joe_Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.

Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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