The Battle Plan For Combating Family Debt

Step 4

Raid your non-retirement savings, leaving just a small–$500?–cushion. Apply the money to your debts. (If you subsequently have a big emergency, you can always borrow.)

Step 5

Time to make a debt payment plan. Brace yourself for some controversy. Simple math says pay down your highest-rate debt first and make the minimum payments on everything else. The math is undeniable. It is RIGHT. Except many people have extra-mathematical things called emotions.

Researchers at Boston University’s Questrom School of Business tracked consumers who were using HelloWallet to try to pay off credit card debt over a three-year period and reported their results in the Harvard Business Review. The most successful debt reducers focused on paying off their smallest balance first. If they paid the $1,000 balance down by $500, their brains seemed to say, “Wow, I just cut what I owed by 50 percent. One more month like this and the debt will be gone! I love debt reduction.” Had they instead spread the money over multiple accounts or put it toward the largest balance, they would have felt worse.

Many people paying down debt are like dieters. They are encouraged by good news and discouraged by an apparent lack of change.

So are you the pure math type or not? I don’t know — and you may not know either. So first, do the math. See how much it will cost you in extra interest charges if you eliminate your smallest balance first. And so on. Just because you start one way doesn’t mean you can’t switch.

Experts disagree. Ric Edelman says math should rule. Dave Ramsey believes people need the motivational kick that comes from extinguishing one debt quickly.

My view: eliminate the smallest debt first, then tackle the most expensive one. See what works. Then repeat.

Almost everyone agrees that when you eliminate a debt, you should reward yourself. Get a sitter and go out for dinner and a movie—or whatever passes for legalized fun in your world.

If you haven’t already, at some point analyze where your money went over the past year. Everyone who does is surprised by something. To make sure debt doesn’t get out of hand again, use a budgeting program like Mint. Or you might turn to your partner and say, “I don’t think little Luke really likes Mandarin.”

Andrew Feinberg is a writer and money manager. He is the author or co-author of five books on investing and personal finance, including Downsize Your Debt. His work has appeared in the New York Times Magazine, GQ, Barron’s, The New York Times, Playboy and The Wall Street Journal, among other publications.

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