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.

The American middle class has been experiencing downward mobility for some time, but it’s been somewhat disguised. The slow creep upward of goods and services has almost, but not quite, been matched by pay increases. Overall, the value of income has been going down fairly steadily, but now, with a sharp rise in prices, mortgage foreclosures and job losses, the truth is hard to miss. The American dream: steady upward mobility, a home of your own, sending the kids to college, and the hope that they will do better than their parents, has exploded into dust.

There may be some comfort in looking around and seeing that most people are in the same boat, but there is also resentment and indignation. “Why did this happen to me? Why should I have to give up so much of what I’ve worked hard for?” Those feelings are natural, but they can get in the way of examining your values and needs, and making changes that can minimize the negative side of lower expectations. It’s a hard blow when your hopes and dreams prove the truth of the old adage: what goes up must come down. Your future depends on how you deal with it.

Shoppers are flocking to thrift stores, families with teens are learning how to say “no,” to requests for the latest and shiniest toys, and drivers are discovering the (sometimes dubious) joys of public transportation. But will all this economizing last? Is frugality just another temporary necessity that people will gladly give up when (and if) things return to normal?

The environmental movement isn’t much of a presence these days, even though green living is a buzzword that’s often in the news. When financial survival is a priority, there’s going to be more concern for financial than environmental solutions. This means that green living and frugality aren’t translating into the environmental consciousness of the 70s and 80s. Saving the earth seems far less important than saving ourselves. For the average person, just getting through this economic crisis is about all they can deal with.

On a larger stage, though, this can be a short-sighted mistake that will have eventually have serious consequences. A news report in Wired indicates that investment in green projects is slowing down because money is so tight. “’The general economic slowdown is taking everybody’s eyes off what was an increasing momentum around concerns of climate change and the cost of energy,’ said Paul Maeder, a general partner with venture capital firm Highland Capital Partners.”

The current drop in the cost of oil (which is probably temporary) is also contributing to decreasing interest in long-term energy projects. The danger is that, companies that are developing these projects may well go out of business, just when they are badly needed. It’s happened before, and is one of the reasons why technological advances in energy production have been few and far between over the last few decades.

Taking care of today’s problems may be the top priority, but we also need to keep an eye on the consequences of ignoring long-term problems and solutions. It’s difficult to absorb the idea that, in the long run, saving the earth is a requirement for saving ourselves, but it’s just as important for individuals as it is for corporations, governments, and investors.

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.”

Every so often I take a look at Seth Godin’s marketing blog. Marketing isn’t a subject I’m wildly interested in, but Godin always places his posts squarely in a context that makes them meaningful even for those of us who have nothing to sell. If you’re not familiar with him, he’s a respected marketing guru and the founder of Squidoo, a content site which was roundly booed by many analysts at its inception. In spite of all the predictions of its certain failure, it’s been incredibly successful.

Godin’s latest post, The Sad Truth About Marketing Shortcuts , is about building solid foundations vs going for the short-term money. Squidoo allows its lens masters to designate part or all of their profits for charities of their choice. Some people set up Squidoo lenses specifically to support charities, apparently quite successfully. The site eventually distributed $80,000.00, and Godin tells us how some of the charities responded.

“Do you know what they wanted to know? “When was the next time we can rally a lot of people to get more votes and donations?” Do you know what not one of them asked? “How can we get our supporters to actually lay some groundwork so we can make this sort of money every week?

“It made me sad that so many non-profits have precisely the same mantra. Rush to the easy money, then look for more and rush after that.” It’s the same mentality that helped bring down the American economy.

Godin goes on to talk about the thousands of Squidoo lenses that are started, most of them soon abandoned by their creators. “But,” he says, “a few stick it out and many earn $2,000 or more a month in their spare time (for themselves or for charity). The difference is clear but sad. The shortcut didn’t work right away, so they’re off to the next thing.”

When your life is in disarray and in danger of falling apart, the worst thing you can do is go rushing off in all directions, without any clear idea of what any one action is supposed to accomplish. There are always things that have to be taken care of immediately — the short-term goals — but to get your life under control, you need to distinguish between short-short solutions to problems, and long-term plans that will prevent those problems from recurring, or that will at least allow you to have some control over their impact if they do recur. You have to build a foundation that will support you and minimize the effects of economic fluctuations, including job loss. And the only way to do that is to know what your goals are and which ones are most important for the long run.