Sunday, 23 April 2017

Debt Reduction Myth-Busters






Paying down debt seems to be the focus of so many twee and cheery posts and pins on the interwebs.

The facts are that there is no easy way to pay down debt, no trick, no magic formula, no secret, no book, no hidden knowledge that will help the basics of paying down debt.  It just needs to be done.  True, there are revelations about how much the debt is actually costing us and how to minimize the impacts of interest and also various tips on how to stay motivated and focused.....but absolutely no magic wand.


Line-dried whites.


The cold hard facts are that the entire principal, remaining interest and any contractual fees absolutely have to be paid.  If such-n-such 'real' couple on Pinterest claim to have paid down their debt of $300,000.00 in only two years, then they are absolutely paying down $5769.24 a fortnight - period. The math does not lie....but the stupid hype makes it all sound like debts just evaporate with the greatest of ease just by thinking about it. It doesn't.

Paying off debt takes courage, determination, plenty of sad days and many sacrifices.

If you know someone who has paid off all their consumer debt without assistance, then know of a surety that these folk have characters that run deep.


Saving pennies helps me be prudent with larger sums.


I have had a change in heart about the best method to pay off debt. Once-upon-a-time I used to be a big believer in the power of the debt snowball method (starting with the smallest debt first) which appeals to the emotional side of the brain. I used to argue strongly that because we often get into debt for emotional reasons then the best way to tackle it is to harness the opposite emotions via the debt snowball method. I no longer believe that. I have personally been very successful using the debt snowball method, however I wasted a lot of money choosing this method when I could have used the debt avalanche method (fully focusing on paying the debt that costed me the most each month first). The math speaks the truth of the matter.


Being frugal does NOT mean
living poorly.


I base this change of approach purely on the fact that once we start tackling our consumer debt, it quickly goes from being exciting to utter drudgery (albeit drudgery with a purpose)...in fact so quickly that the emotional benefits of the snowball method are speedily lost.  That being the case, the quickest way to attack consumer debt is to target the debt with the largest monthly interest/fees first to ensure that the hard slog of debt reduction does not drag on a day longer than necessary. Who wants to still be paying off debt months longer than necessary just because of a spurious long-forgotten notion regarding how we felt about it in the beginning?!


Hot homemade pasties with
delicious flaky pastry


If any of you dear folk are currently using the snowball method, I encourage you to swap across to the avalanche method. You are putting in the hard yards already......so you may as well finish the race sooner using the exact same dollar commitment.

Changing one's mind for a more powerful outcome is always so satisfying.


Kombucha SCOBY anyone?
Plenty to spare!



Take care folks and stay nice.

Mr HM



14 comments:

  1. We went out of business owing $80,000. We paid that off at $400 a week for 6+ years at 10% interest. Rolling on 10 more years we have been apying off our sons funeral and headstone and some personal debt- a balance in total of $28,000 at $500 a fortnight and on July 11th we will be debt free apart from 1 small CC with 0% interest till it is paid off. WE have a job that the house is supplied and people wonder WHY we do not want to go and buy a house. I am so burnt out paying off debt that I just do not want to go there ever again. Your post is very encouraging to those on the debt-free road Mr H.

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    Replies
    1. I'm hearing you about debt burn out - yep, yep, yep

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  2. I still think the snowball method is a good idea for those people who are really struggling, aren't used to paying off debt or handling their money well. To pay off one or two small debts, would give them a sense of achievement, and make them feel like they are getting somewhere, and that it is all worth while, even though the maths of it doesn't stack up. Perhaps once they pay off a couple of debts, and have hopefully learnt a lot about handling money on the way, then they could switch to the avalanche method.

    What I like most about this post, is that it demonstrates your willingness to change, think differently and try a different approach, we all could do with that lesson.

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    Replies
    1. I have more to say on the subject too, there is definitely room for a smattering of snowball especially at the start as you say

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  3. Love this post, it's true, you should absolutely give the debt that is costing you the most, your undivided attention until it's gone. Makes total sense. And I would love some Scooby if only I lived nearby. Have a wonderful week.
    Fi

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  4. I think you're spot on Phil. This is by far the best way to reduce debt. One thing that really helps is to stay away from the shops. I have a friend who has her groceries delivered by that big supermarket. At first I thought that was frivolous, however she finds she doesn't get tempted by all the extras that she, her kiddies and in fact also her husband would see at this shop. She pays $10 for delivery and is way ahead with her budget. I think this method is wisdom in her situation. Of course others would disagree with this but it works well for her and that's what matters. Oh, and she also saves on fuel as well. We were paying off our farm at a time when the interest rates were 22% and I can tell you it was tough. We are retired now and are debt free and it really does feel good to know that you owe nobody anything. Keep up the good work.
    Blessings Gail.

    ReplyDelete
    Replies
    1. We now get grocery deliver for these exact reasons too.

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  5. Phil, I didn't know this approach had a name, only that we did it. When we got married 30 years ago we both had debt. Mine was CC and Bluey's was tax debt. We decided then that we had to work at being debt free. We did this and then went on to saving for a house deposit. A house was purchased and we spent 15 years of slogging along and got that paid off. We always ate well and did fun, free things together as a family.
    Being debt free is a choice. It requires a plan to make it happen, but it is a very sweet place to be.

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  6. Long-suffering and endurance seem to me to be the qualities needed in abundance when trying to achieve any financial goal be that reducing debt or saving. I wonder if that couple mentioned had any financial gifts or windfalls that helped them? They would have had to have good income to pay off that debt even if they were extremely frugal with their income.

    ReplyDelete
    Replies
    1. When you do the math it quickly become apparent the claim is probably fictitious nonsense.

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  7. All those winter warmer meals - especially the pasties (mmm) look delicious. We paid $40,000 off the principle of our mortgage, in 10 years. It helps that the interest, only got lower, and we kept paying the same amount. ;)

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    Replies
    1. The more that can be paid down early in the debt's life the more effective those payments are than payments made later.

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  8. It would be so lovely if there was a magic wand! I'm halfway through paying off my student loan and it is definitely feeling a lot like drudgery than magic.

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  9. I have one CC that carries a balance...obtained to purchase a large item...it also came with $150 rebate and no interest for one year...it will be paid off by then since it's been used for nothing else...one CC that is used to pay for most everything else to earn reward $ ...paid off monthly...it took years of financial stupidity to get to this point...went back to school later in life so still have student loans and mortgage...

    No complaints here...I live a make do, mend and do without lifestyle...lots of good ideas on your blog!

    ReplyDelete

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