In the same way that Michael E Gerber maintains in his book ‘E–Myth Revisited’ that there are three kinds of people when it comes to starting your own business, Mary Hunt, in her book ‘Debt Proof Living’ maintains there are three kinds of people when it comes to attitude to debt and she describes them as follows.
The Revolvers: A typical example is Debt Ridden Dexter and he rides the escalator of life. The only problem is that he goes the wrong way, trying to climb UP the down escalator. This sounds like fun at first (watch kids at the mall or shopping centre!) but swiftly gets tiring and stressful. Initially he can keep up but every other debt added is like an extra shopping bag, rucksack, suitcase, briefcase and box to carry. It gets harder and harder and he eventually becomes unable to keep up the momentum of the escalator. Eventually he ends up at the bottom, battered and torn; he possibly gets himself sorted out, but always he starts to climb again.
The Daredevils: They live from paycheck to paycheck, paying off their debts every month but never having any reserve. Occasionally they revolve their debt for a month or two (summer and Christmas are typical) but they usually get themselves straight again. Unless something horrible happens.
The DPL’s: These are the debt proof livers, people who design their financial lives carefully, only using cards and loans only when they fit in with their strategy or financial plan. They don’t buy on credit, invest before they spend and have plenty of reserves. Everything they do with their money is ‘on purpose’ and they live exuberantly and with confidence because they have their future sorted.
My friend Alan is a very sophisticated example of a DPL and he recently staggered me by explaining how he put his household expenses monthly in a high interest savings account, while running his day to day expenses on his 0% credit card (with airmiles), paying it off at the minimum amount due from the high interest account. At the end of the term, he either pays it off in full from the high interest account or moves it to another 0% card.
He showed me how it works on paper, and he is effectively putting the cost of his life on hold for nine months, giving him the use of his money to work for him, in the meantime. I have to tell you that Alan is a bone fide genius (tested in the top 5% of the population) and is very very disciplined and organised. Don’t try this one at home kids, unless you are very confident that you can make it work!
What kind of a person are you?
And what kind of a debtbuster do you want to be?
So do we pay off the biggest debt first, or the one with the highest interest charges?
Financial intelligence would suggest that you should pay off the one with the highest interest rate first, but somehow, at the beginning, it seems too hard. If you are the kind of person who might get easily discouraged, then start with the smallest debt first. You pay the absolute minimum on all others, and put the balance of the monthly amount you decided to commit, towards the smallest debt. When that is paid off, move that amount to the next smallest and so on. You can see that this will be like a snowball, gathering momentum until it’s racing downhill almost effortlessly, taking your remaining debts with it.
If you are a person with iron willpower and the only reason you have debts is because of circumstances beyond your control; those circumstances having now changed for the better, then start with the debt with the highest interest rate.
Draw your debt busting grids, one for each debt, with a square for each payment and have some fun colouring them in every month.
This extract was taken from the “Debt-Busting Chapter” of
Nicola’s book “The Money Gym : Wealth Building Workout”
The Money Gym Wealth Building Workout
By Nicola Cairncross
Includes a forward by C4’s Secret Millionaire Gill Fielding
Gill Says: “This book is a template for anyone who wants to create wealth. It will tell you the path to take and what do do… There is no better teacher and mentor than Nicola.”