Debt Reduction – It’s Not the Method, It’s the Plan

I am constantly seeing posts about debt reduction. Whether it is people talking about Dave Ramsey’s baby steps, paying the highest interest first, or Baker talking about his Debt Tsunami.  Why is it that so many people are looking for a method, or an excuse, to pay off their debt? Many a blogger has written on the differences, the pros, and the cons of each of these methods. Most recently Flexo with Consumerism Commentary has covered the Snowball approach and the Avalanche approach and touched on a few others. I will pare it down even further for you.

Debt Snowball

The debt snowball is based on the psychological concept that little wins will encourage you to continue on your path of debt reduction. You start with the lowest balance debt and then work your way up. As you pay off each debt you then snowball the payment into the amount you pay towards your next debt. With each successive accomplishment you will be that much more confident in continuing on our journey.

Highest First (Debt Avalanche)

This is the method that makes the most fiscal sense. You pay the minimum payments on all of your debts, except for the highest interest debt. As you eliminate the higher interest payments you are saving yourself increasing amounts of money and providing more money to pay down the remaining debts. The main argument against this plan is the amount of time it may take you to pay down your higher interest debts. This is why you need to stay committed to your overall goal of getting out of debt. In the end this method is going to save you more money.

What Counts

I am frugal by nature so my method of choice would be to pay off all consumer debt from highest interest to lower interest, regardless of the balance. I agree with the Ramsey fans that the psychological of small accomplishments can help propel you forward in your debt reduction, however, many people aren’t as bad off as you think and those people will be better off by paying down their higher interest debts first.

My wife and I are down to only my student loan in consumer debt. We still need to pay off our second mortgage and mortgage, but both of these are secured by the house and while important to pay off, aren’t as important as the rest. In thinking about each of the methods most people choose I came to a conclusion, it really doesn’t matter. Each of these methods has a common element. Each method requires you to sit down and take inventory of your debts and then make an educated decision on how best to handle them.

The reason these methods work is they require you to develop a plan of attack, a method of debt reduction. My wife and I have found it most effective when you sit down and write out a schedule of dates and balance goals for the debt you are concentrating on. Schedule out each payment and principal reduction amount, then set it in your mind that you are going to meet or exceed each of those goals.  Take it even further by including the next debt on your schedule, you can visualize the payment being rolled into the next and visualize the reduction of principal balances before they occur. This method has allowed me to gleefully receive the title to both of my vehicles in the mail. Those little pieces of paper have made me happier than any other piece of mail I have ever received. When you sit down and asses your situation and then write out a method of how to deal with it, you are making yourself accountable for your goals. You have placed in writing specific milestones to achieve and you have something to work towards.

Keep in mind that planning is not limited to your debt reduction strategy, you should plan out how you intend to stay out of debt in the future. If you wife wants a new, well new to her, Chevy Tahoe then you need to plan on how you can purchase that item debt free.  Accomplishing your goal of becoming debt free is worthless if you don’t also develop a plan for staying out of debt. So whether you are going to do a Debt Snowball, Avalanche, or Tsunami, plan your attack and execute it with laser precision. Then build your defenses to prevent a counter attack. Financial success is a battle that is won by the determined and the committed, not the casual saver.

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1 ctreit June 10, 2009 at 8:37 pm

This is a great post. So much time has been spent discussing the various debt reduction methods. But you point out that being willing to reduce debt is the most important step when you actually want to reduce debt. The old adage, “If there is a will there is a way” is forgotten all too often when we discuss debt reduction. (Well, sometimes willing it may not be enough, but that is only so in extreme cases.)

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