“The best way to predict your future is to create it.”
~ Abraham Lincoln
Mark McCormack, in his New York Times best selling book “What they don’t teach you at Harvard Business School”, found that Harvard MBAs who had clear written goals were not only more likely to attain those goals, they had earnings anywhere from twice to ten times as much as those who did not specify their goals.
Research has shown that the biggest factor in achieving your goals is whether you’ve written them down and whether you’ve set into motion specific plans for achieving those goals. This is especially true for money and debt related goals.
A clear goal is specific, not general, and it contains a deadline. For example, if you’re $2000 in debt, don’t say, “I want to be debt free.” Instead say “I want to pay off my $2000 debt by the end of this year.”
Having a clear goal, however, isn’t enough. A goal is a desired result – it’s a vision of what you want. The challenge is how to get it, and this is where a plan comes in. A vision shows you where you want to go, a plan tells you how to get there. Together they are an unbeatable combination, and boy, it feels good to accomplish a goal you’ve set for yourself, especially one that increases your net worth, like reducing your debt.
Fortunately when it comes to paying off debt, there are known strategies that have been shown to be highly effective at reducing debt. One of the most effective is called “snowballing,” and there are three versions of this strategy:
1. Snowball – Lowest Interest Rate First. Let’s say you have $200 per month that you can use for debt reduction. Let’s say you have three loans or cards with interest rates of 22%, 18% and 9% and they all have about the same balance. Let’s also assume the minimum monthly payment on each is $32, $28, and $18. For the two highest interest rate loans or cards, start making only the minimum payments, which would total $60. Use the rest of the funds, $140, and send that to your lowest interest rate card. The advantage of this particular snowball strategy is motivational: it’s the quickest way to pay off one of your loans or cards, and think about how great that would make you feel! Once you’ve paid that debt off, do the same thing with the remaining debts.
2. Snowball – Lowest Balance First. This is almost like the first strategy except you first pay off the loan or card that has the lowest balance. The advantage of this particular snowball strategy is still the same — motivational – but which strategy would pay off a debt first depends on the balance, interest rates, and available funds. Lifehacker.com recommends “What’s the Cost” snowball calculator to help you decide which debt to pay off first.
3. Snowball – Highest Interest Rate First. While the first two strategies are motivational because they help you eliminate some debt sooner, in the long run, they may not be the most efficient. “What’s the Cost” snowball calculator allows you to enter up to 20 different debts with their associated APRs, and the total amount you want to spend per month servicing your debts, and it’ll work out the order in which you should pay them together with the monthly payments.
Finally, if your spending habits are under control, i.e., you can set aside money each month for debt reduction and you’re currently NOT going deeper into debt, then a debt consolidation loan may make sense for you, and a great way to consolidate a debt is with a peer-to-peer loan. To read more about peer-to-peer lending, see: How a Peer-to-Peer Personal Loan can Help you pay off Debt.