30 Days to a Better Man Day 25: Start a Debt Reduction Plan

by Brett & Kate McKay on June 24, 2009 · 8 comments

in 30 Days to a Better Man

Since I’ve graduated law school, I’ve been taking a look at the debt Kate and I have accumulated during our time in school. And it isn’t pretty. I hate debt.  I hate the feeling of owing another person money. I hate thinking, “Oh good, I have x amount in savings!” And then realizing that when I take into account how much debt I have, I actually have nothing to my name.

Some debt is necessary for getting ahead in life and building a future. But there are few things more emasculating than excessive debt. A man should strive to be as self-reliant as possible. To be able to stand on his own two feet. To be able to plan for the future without being hobbled by the past. To be free from the shackles of dependencies. To live without another man looking over his shoulder.

Debt robs you of these things. The interest from your debt is your captor, shadowing you wherever you go:

“Interest [on debt] never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”
-J. Reuben Clark Jr.

Over the past 10 years, people had a pretty lackadaisical attitude about their finances, thinking that the economy would keep pace with their debt. The recession has burst this bubble of fantasy. The average American family is carrying $8,000 to $10,000 in credit card debt, and that doesn’t even include the amount they owe on new cars!

People have  awoken from their orgy of spending with a nasty, debt-filled hangover. Even if you’re not hurting too bad from debt that you’ve taken on, paying down your debt is definitely the manly thing to do.  Being debt free grants you an unmatchable feeling of independence and self-respect.

There are several ways to go about attacking your debt. Below we provide two suggestions. But the first thing you need to do is figure out how much can afford each month to pay down your debt.  So let’s start there.

Note: Many financial experts recommend you start an emergency fund before you start paying down debt. The choice is yours.

Come Up with Your Monthly Debt Nut

If you haven’t been paying anything towards your debt or if you haven’t been paying very much because you feel as though there isn’t any wiggle room in your monthly income, then the first thing you need to do is figure out exactly how much you can pay towards your debt each month by completing a monthly budget.

Go back to your budget that you created a few days ago. How much do you have set aside for paying down debt? Could you set aside more? You might be thinking to yourself, “There’s no money left to go towards paying down my debt! I’ve reached my limit.” But I’ve found if we look hard enough and are willing to sacrifice, we can always find more money that can go towards paying down our debt. For example, you could get rid of cable, share one car with your spouse, or take your lunch to work instead of eating out. Do enough of these little things and you’ll quickly have a nice wad of cash that can go towards paying down your debt.

Option #1: Pay Off the Debt with the Highest Interest Rate First

Paying off your debt with the highest interest rate first makes the most economic sense. By tackling the loans that are costing you the most in interest, you can save yourself money in the long run, and you might be able to pay off your debt faster. Follow these steps to begin reducing your debt this way:

Grab a piece of paper and list all your debts in order from highest interest rate to lowest interest rate. Usually your highest interest rates will be on credit cards and car loans, and your lower interest rates will be on student loans.

Focus on paying down the debt with the highest interest rate. Take the debt nut that you just calculated out and direct as much of it as you can towards paying down the debt with the highest interest rate.

Continue making minimum payments on the rest of your debt. You can’t pay one creditor at the expense of others or else you’ll wind up in deep doo doo.

Once the debt with the highest interest rate is paid off, start putting the money you were paying on it towards the debt with the next highest interest rate. When that debt is paid off, start going after the next highest interest rate, and so on until it’s all paid off.

Option #2: Dave Ramsey’s Debt Snowball Plan

One debt repayment plan that’s popular with folks is Dave Ramsey’s “Snowball Plan.” Here’s how it works:

List your debts in order from lowest balance to highest balance. Don’t take into account the interest rate. We’re just focusing on the balance of the debt.

Allocate as much of your monthly budget as you can to paying off the debt with the lowest balance.

Once the debt with lowest balance is paid off, you add the dollars that had been going to that debt to what you’ve been paying against the next lowest debt. Each time you pay off a debt, the amount you can apply to remaining debts is a little bigger. Thus, the name “Debt Snowball Plan.”

The benefit of the debt snowball plan is psychological. By having success paying off small debts first, you’ll receive instant positive feedback that can encourage you to continue paying down your debt. The drawback to the snowball method is that you’ll end up paying more in interest than you would if you went after the debt with the highest interest rate first. However, if the idea of paying off a $10,000 credit card bill seems too daunting, go after the low hanging fruit by paying off the $2,000 bill first. It will hopefully get you started down the path of reducing your debt.

Today’s Task: Start Paying Down Your Debt

We’re not going to pay off our debt overnight, but we can at least get started. Today’s task is to sit down and establish a debt reduction plan. Report to the Community which method you’re going with and which debt you’re going after first.

{ 8 comments… read them below or add one }

1 Cutter June 24, 2009 at 8:17 pm

Before I got married, my grandfather told me to buy EVERYTHING with cash. Even my house. Just save up for it, he said. I didn’t know how to tell him that a used car costs more now than what he paid for his entire 260 acre farm back in 1936. He died at 100, never having taken a single thing on credit in his life. He never owned a bank or credit card, and even hated writing checks.

My family is working on a debt-busting plan, but it will take a very long time. I should have listened to my grandpa.

Our entire economy is built on two things: debt and growth. The economic growth is funded by increasing debt, and loans are dependent on the success of growth. It’s a toxic combination & it simply cannot go on forever.

2 Dave June 25, 2009 at 7:57 am

Enjoyed the quote from J. Reuben Clark! I am actually in a position to eliminate some of my debts today so the post came in handy.

3 Brian June 25, 2009 at 8:55 am

I think it’d be appropriate to introduce a financial concept entitled “Bank On Yourself”. It ultimately boils down to a specialized savings vehicle. The concept revolves around the idea of financing all major purchases through yourself – that is, to pay for a major purchase (i.e. house, car, yacht, vacation, whatever you want) 100% in cash that you have on hand, then pay YOURSELF back the principal cost IN ADDITION to the interest cost you would have paid a financing company if you were to finance through them.

As this is a concept, it can be used anyway you want. The past few years I’ve applied it using only a couple of envelopes. It also works with bank accounts, MMAs, and so forth. However, it works best with – believe it or not – the CORRECT type of life insurance account.

Feel free to check it out: bankonyourself.com

Oh yeah, not trying to sell it, just thought B.O.Y. fits with this post really well!

4 Nate June 25, 2009 at 9:02 am

Great post!
I have been using Dave Ramsey’s Debt Snowball method for a few months now, and I’m happy to report that it’s going very well! I had three credit cards with four digit balances. I paid a little one off, and next month I’ll have the second one paid down. The psychological effect of getting these things out of the way shouldn’t be understated. It’s VERY encouraging to sink a balance to zero, especially if you’ve been carrying it a while. In fact, when you get close to getting rid of a balance for good, it becomes very motivating. I will make bigger payments than I thought I could next month just to see that balance disappear. I’m wasting less money this month and next month to get that sucker gone!
Thanks for the post!

5 Torrey June 26, 2009 at 7:00 am

Debt can rob us of peace. Especially when you have fallen behind and are receiving collection calls and notices. If we just put our mind to it and focus on how much life would be better without it, I think more people would start paying off all of their debt. My wife and I have eliminated about $60K of debt in 3 years.

Over at mensplaybook.com, we just suggested 86 ways to get out of debt. Hopefully, we can encourage each other and apply some of the practices to our own situations. http://bit.ly/1cKuz

6 elementaryfinance June 27, 2009 at 5:47 am

Often debt repayment needs to get creative. Find those small expenses that you can cut out from day to day. They add up fast.

7 Christine the Soccer Mom June 30, 2009 at 5:20 am

Our family started Dave Ramsey’s Total Money Makeover about a year and a half ago, and the results have been astounding. Nate is right when he says not to underestimate the mental lift you get from paying off a debt, even if it’s small.

I’ve blogged about it sometimes, but our family has paid off a massive amount of debt in a short time, and can see the light at the end of the tunnel. We’re now helping our children see the benefits of paying cash and saving up. And all this happened just before everything started crashing. With the way credit card companies are treating even their “good” customers, we’re grateful to the people that handed that book to my husband in December ’07.

8 Mike July 1, 2009 at 3:23 pm

Just a quick note about paying off the high interest stuff first vs. Dave Ramsey’s debt snowball. I need all the math in paying on off our debt. We have a bout $40,000 to pay everything except the house. When I did the math (actually, when I let the a spreadsheet do the math), the difference between high interest and snowball is only about $500 in favor fo the high interest method, however, the psychological advantage to paying off all those little debts is work the $500.

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