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Repaying High Interest Debt

Michael Blue

Interest is a funny thing. When it is working for you, it has tremendous power. When it is working against you, it has devastating effects.

Interest on consumer debt (usually represented by credit cards, payday loans, car loans, etc.) is one of the most damaging expenses in a budget. The first problem is that interest causes you to pay more for an item than the original purchase price. Depending on how long it takes you to repay the debt, you may end up paying double the price of an item. The second problem is that in order to pay interest off you have to earn money and pay taxes on that money. This means that if you owe $100 of interest, you may have to earn $120 or more to repay it.

All of this demonstrates that consumer debt is really easy to get into and really hard to get out of. It’s like emptying a tube of toothpaste - it’s really easy to squeeze it out, but really hard to put the toothpaste back in. Many people get so overwhelmed by their consumer debt that they get discouraged before ever beginning a repayment plan. I want to give you some encouragement and hope by offering some simple steps to begin paying off your debt. Understand that getting out of debt takes time, so you will need to take a long view, but I can promise you that you will never regret repaying your debt!

So with all that in mind, here are some steps to repay your debt:

1. Stop using consumer debt to purchase things.

If you use a credit card to buy something, make sure you pay it off monthly before any interest is charged. This process needs to start with the resolve that you will do everything within your power to not take on any new debt.

2. Figure out how much debt you actually have and write it down in order from smallest to largest

(Don’t include your mortgage or student debt in this plan - that is a plan for another day once you get rid of your higher interest rate debts).

3. Determine how much money you can reasonably apply to the repayment of your consumer debt each money. 

Don’t get too aggressive at the start as that may end up discouraging you. A good goal is to find a way to pay more than the minimum payments required each month. This step may require you to create a basic spending plan so that you actually know where you are spending your money. Figure out places you can trim your spending up each month and be disciplined in your spending.

4. While paying the minimum owed on each debt, take the “surplus” money you identified in #3 and use that to pay off either the debt with the lowest balance or the debt with the highest interest rate.

(If you will be motivated by having a quick success, then I would recommend starting with your debt with the lowest balance). When you have paid off this first debt, take ALL the surplus money (including the minimum payment you were paying on that now repaid debt) and start paying off the next debt (either lowest balance or highest interest rate). Continue doing this until all of your debts are repaid. This strategy is commonly referred to as the “debt snowball” strategy.

5. Celebrate your successes along the way.

When you repay a debt, consider taking some of your surplus in the next money and celebrating in some way. It is important to have things to look forward to along the way.

6. Pray for God’s strength and consider asking someone to help keep you accountable on this journey. 

Encouragement from others can be really important in being successful in this journey.

The process may not be quick, but the sacrifices it takes to get you out of the debt situation are the things that will keep you from getting right back into the same situation. Starting something like this is often times the hardest step, but if you don’t start now you’ll just look back in a year and realize you are no closer to paying your debt off. The old Chinese proverb about the best time to plant a tree is helpful here: “The best time to plant a tree is 20 years ago. The second best time is now.” So let’s get started so that next month you can look back and see a little bit of progress. That progress will grow over time and before you know it you’ll be looking back grateful that you started.

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Michael Blue

Michael Blue serves as the Executive Director and General Counsel for the Ron Blue Institute for Financial Planning. Michael holds the following professional designations and degrees: Certified Financial Planner TM, Juris Doctorate from Baylor Law School, and Master of Theological Studies from Southwestern Baptist Theological Seminary. 

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