Getting Back to Basics

Paying off your smallest debts first isn’t the best choice when it comes to pure dollars and cents, but it can have beneficial psychological effects. The worst part of owing money to several different sources is that making real progress in becoming debt-free can seem impossible. If you have only so much extra to supplement your regular monthly payments, it’s hard to see where it can make a real dent.

The traditional recommendation is that you pay off the biggest debts first because they’re the ones that are piling up the interest charges. But quite a few financial advisors recommend getting the smallest ones out of the way first. If the biggest debt is going to take years to eliminate, the money you sink into it seems as if it’s going down a dark hole because the balance hardly budges with each payment. With a small debt, you can not only see real progress, you know that before long, you’ll have one monkey off your back.

When that happens, you can put the normal payments for that one, plus whatever extra you’ve been throwing in, to work on the next smallest. You’ve now increased the amount you have for those payments, and that debt will shrink even faster. Working from the small end means that every time you pay off one debt you have that much more to pay towards the next smallest one. It also gives you more choice about where you want to put the extra dollars. Once you have enough to make a difference, you can split it up and chop away at both ends, adding some of it towards the largest bill. One way to give yourself a good feeling about that big load at the top is to add the amount of the monthly interest to what you’re already paying.

Because the reward center of your brain responds more positively to accomplished goals than to small improvements, each debt that you get out of the way gives you an encouraging boost that helps you stick to the plan. Instead of staggering under a weight that never seems to get much lighter, you’re dumping one load after another. That psychological hand up could make the difference between being debt-free as a reward for your hard work, or giving way to frustration and despair, and plunging into bankruptcy and all its unpleasant complications.

Today’s post is a follow up to Building Solid Foundations

Sticking to the job of paying down your debts is as much psychological as financial. When you can see your debt load shrinking at a satisfying rate, it may encourage you to scrimp a bit more and find extra dollars to speed up the process. Even if you don’t want to cut back every month, the progress you’re making can give you a great motivation for looking more closely at your expenditures and finding things that you can eliminate without any real suffering.

Most people don’t realize that a lot of our outgo is based on nothing more than habit. You get used to having something on a regular basis and can’t imagine doing without it. It’s true that there are some things you really can’t do without. In addition, if you eliminate everything that enriches your life, the loss will merely contribute to your sense of impoverishment and your unhappiness. But if you can adjust your vision and see that “used to” isn’t the same as “have to have,” then cutting out or cutting back isn’t such a deprivation.

Take the time to think about what your life was like before a particular “used to.” And then take a close look at it. Has it improved your life in any significant way? Is it doing something for you, or allowing you to do something, that really can’t be done, almost as easily, in some other way? What would you really be missing, and for how long, if you gave it up? Remember, “getting used to” works both ways. Giving up something starts a process of getting used to being without it. Eventually, you wonder why it seemed so important, and why you thought you couldn’t live without it.

The process can be made easier if you can find substitutes, or find real reasons to cut back. Buying your favorite brand of coffee by the pound and brewing your own instead of paying through the nose for the single cups at the coffee bar allows you to continue your enjoyment at lower cost. And maybe the process of making that change will jog your brain, and you’ll realize that you’re really drinking way too much coffee. Now your jangled nerves and your overall health give you some additional motivation.

When necessary changes have a positive impact on your life they are easier to deal with than when they’re based solely on dollars and cents. That can make a big difference in how you view “used to” and “can’t do without.”