Paying off High Interest Consumer Debt
Paying off high interest consumer debt is important to building a strong foundation in your personal financial plan. You cannot be successful financially if you spend more than you earn or you carry high interest consumer debt. Both will continue to compound until they become unavoidable and unmanageable so you need to attack them immediately. There are a few important principles to consider before you create your plan to pay off your high interest consumer debt:
Accept your debt and be honest with yourself. Give yourself some grace for how you got into this situation, but also accept that you need to get yourself out of it. You have to be honest with yourself with how much you owe and how much you will need to change your lifestyle to pay off the debt. Lying to yourself on either will not put you on the right path to pay it off.
Understand it won’t happen overnight. Paying down debt will take time and discipline so you’ll need to accept that, but the long-term benefits from the muscle you’ll build by practicing self-discipline will be a huge benefit in itself.
Now that we understand the guiding principles, lets walk through our steps for paying off high interest consumer debt.
Create the Plan
The most important part of creating a plan is to create one that both works for you and that you will stick to for the long-run. There will likely be some hard life decisions, like skipping your annual vacation or selling a car, but you need to find the path that you can stick with.
To create your plan the first step is to document how much high interest / consumer money you owe. This should not include your home mortgage or medical expenses, but should include any car payments and all credit card debt. You should document (1) the vendor that you pay (e.g. Mastercard), (2) the amount you owe and (3) the interest that you are incurring on that loan. My advice is to cut off spending from those credit cards immediately and start a new one or better yet pay with cash for all purchases while you are working on paying off those credit cards. The reason for that is to psychologically separate the new you – the one who pays off their credit card every month and lives below their means from the old you which is the one who has a really high credit card bill. This tactic will also allow you to better gauge where you are at in paying off your loans.
The second step is to document your plan in a way that you can measure your progress. My advice here is to create a spreadsheet where you list monthly what your starting balance is, how much you paid off and your ending balance. When building your plan, you should create a goal each month and do the math on how long it will take you to pay off your loans. Not to scare you, but to “gamify” it and if your competitive, like me, you’ll try to beat your plan. My advice is to set up small rewards for yourself for achieving certain milestones. For example, every time you pay off X dollar amount you get Y prize. The key is to make sure your prizes don’t put you back into more debt, but you should create some rewards to mentally get you through the difficult decisions you’ll have to make along the way.
Lastly, it’s important to track your plan at a minimum monthly. Some people will want to track weekly which is fine, but everyone must at least track monthly. The purpose for monthly tracking is that it’ll keep you on track and focused if you review at least monthly and will also highlight any potential issues if you are getting off track before, they come a problem. Tracking can take 5-10 minutes of tracking how much you’ve paid down your loans and updating your new balance (including interest your incurring).
Make Life-Long Changes
Paying off your high interest loan debt means nothing if you get yourself back into debt as soon as you pay it off. The key here is to make life-long changes in your spending that will set you up for success. Whether it’s not buying a new car or choosing to downsize your house, there are important steps you can take to “life proof” the foundation of your personal finances that you are working so hard to create. For most people shelter and transportation are their two largest expenses so it’s natural to take an extra hard look at those to make sure you are set up for success. After that, I suggest people review their restaurant and entertainment spend as well as their shopping for other areas you may be spending above what you can afford. In most cases, it’s not about optimizing every expense but rather intentionally choosing where you will spend your money and where you will save your money. You can’t spend it in all places, but you should be able to prioritize certain areas (mine is travel) where you will spend more than you otherwise should because it brings you joy.
The Hardest Part…
The hardest part of this whole process is keeping a long-term mindset and maintaining short-term self-discipline so that you will both pay off your high interest loans, but also make life-long changes to prevent you from taking on those types of loans in the future. My strongest recommendation of this entire blog is to create a reward system and “gamify” this new life and make it fun. For example, if you really want a new jacket, you could make a goal of hitting your expense budget for 4 months and that would allow you to purchase that new jacket. Another example would be to “pre-pay” your expenses like having a goal to save up enough in expense to cover your travel rather than paying off a credit card after your trip. In this case, the trip will be more rewarding because you know how hard to worked to afford the trip and you know you won’t be returning home with debt you need to pay off.
There is no shortage of tactics and strategies for paying off debt, but the most important tip or trick I can provide is to choose something that you can stick with over the long-term. These are not easy decisions and they don’t get easier over time, but the self-discipline that you demonstrate grows like a muscle and the foundation you build for the long-term will more than offset a few hard decisions in the short term.
