Beware debt creep

We know how much our mortgage is, that’s the big one, and it’s the one that gets most of our attention.  It’s a big number and is also a big chunk of our spending in terms of interest.  As it’s also linked to our biggest asset (that’s a different conversation), our house, we can monitor the value of that as well, and as long as the house asset is worth more than the mortgage, we can rationalise and justify that this debt is OK.  It might be tough, and causing us stress, but it’s OK because in the end when we sell our house, we can pay it all back, or over the next 20 years or so, we will have paid it all back and the house will be ours. That’s the theory anyway.

Debt creep is different. It’s the other kind of debt. It sneaks up on us, just like a thistle that appeared in my flower bed. The thistle started out quite small, I didn’t really notice it for quite some time, then it poked its head out in between the flowers, and I thought to myself, “I really must go and pull that out”.

As usual I got busy with other things, plus I don’t really like gardening, so it was easier to just continue to ignore it.

But of course, it has continued to grow, and is now a monster thistle and is starting to consume my thoughts about how I am going to get rid of this thing without getting hurt or destroying the flowers around it.

Debt is just like my thistle, you can ignore it for quite some time, but because of interest it will continue to grow and if left unattended it will begin to consume your life and cause you large amounts of stress.  This type of debt is fondly called consumer debt.  The credit card, buy now pay later deals, and all the other debt we use to buy ‘stuff’. By the time we get around to paying off that debt, we probably don’t value the item as much as when we purchased it, and to add salt to the wound, quite probably if we tried to sell it, we may not very much for it!

In one way or another wen have to deal with it.

Plan A, continue to ignore it.

Or Plan B, do something about it.

When I was wearing my accountant’s hat, I would tell clients they had to pay off the high interest debt first.  It was all about what it was costing to have the debt.

Now with my Money Mentor hat on, I see debt from a completely different angle.  Debt has nothing to do with interest; it is all about the emotions.  It was our emotional decisions that got us into debt in the first place; the interest we are paying is the cost of that emotional choice.

So rather than chip away a little bit at all the debt you have, focus on what you can pay off as quickly as possible and get rid of something. This is the principle behind Dave Ramsey’s snowball method of paying down debt.

Here is how it works.

1. List all of your debt from the smallest amount outstanding to the largest
2. Next to the amount owing, write down how much you are currently paying per month on each debt.
3. Restructure your payments so you are paying the minimum amount you possibly can on all but the smallest debt and see how much extra you can apply to that one smallest item. You may need to talk to your bank or Credit Card Company to negotiate a payment plan.
4. Finally work out how quickly you can clear one debt completely.

I quite like this concept, and I do suggest it as an option to my clients.  If nothing else, it makes you look at your debt in the cold hard light of day and start to make a plan.

There is one extra item I like to add to the list when you are ranking your debt.

5. What is the emotional weight of each of the items on your list?

This question has nothing to do with the amount, or the interest you are paying. This is about how much stress does owing Aunty Jean $2,000 for example cause you compared to your $10,000 car loan?  You may not even be paying any interest to Aunty Jean, but you hate owing her money, so realign your list and pay her off first, and get rid of some of the debt emotional weight.

There are a couple of positive outcomes from approaching your debt this way.

1. You want to trick your brain into thinking that paying off debt is as much fun as the buying that you did to get into debt in the first place.
2.  By completely repaying one debt will get a feeling of success and that will empower you to do it again with the next loan.

If this all sounds just too hard, then take baby steps and start with you can do, this might be simply list how much you are paying on debt each month, it might be making a list of what you owe to who.  Or, it might be selling some of the surplus stuff you have and applying it to what you owe.

There is no right or wrong way to tackle debt.  I just want to make sure you go with Plan B, not Plan A!