The Dirty Secrets of Debt Reduction (and What to Do About Them)

When I was a sophomore in college, I got my first credit card. I thought it was awesome — it was like free money. Soon I got another credit card, and before long I'd maxed them both out. I entered the work force with a handicap. I had the start of a nasty credit habit.

Because I'd grown up in a poor family, I had no notion of proper money skills. I made some bad decisions, which were in turn compounded by some rotten luck. Just five years after graduation, I had about $20,000 in credit card debt. For ten years, I tried to kick the habit. Sometimes I'd make progress, but then I'd find other ways to fall behind.

Here are some of the mistakes I made along the way and the steps I took to correct them:

I had no goals
When I was young, retirement seemed like something for old people. I did not understand the power of compound interest, that starting to save for retirement when I was 24 was far better than starting when I was 39. But more than that, I failed to set financial goals. I didn't dream of taking a trip to Europe. I didn't plan big purchases. If I wanted something, I bought it. On credit.

Eventually, I realized the only thing that the only person who cared about my money was me. I set a goal: be out of debt within five years. You know what? The very act of setting this goal made a huge difference in my life. Suddenly, my money had a purpose. I focused my efforts on debt reduction. I didn't get my debt paid off in five years — I paid it off in three.

I didn't establish an emergency fund
Many financial experts recommend starting an emergency savings account before you begin to pay off debt. I was arrogant. I believed this advice didn't apply to me. But then my car broke down and I needed to make $800 in repairs.

Because I didn't have an emergency reserve, I was forced to open a credit account at the dealership to pay for the repairs. This debt felt terrible. (It would have felt even worse if I'd put it on an existing credit card.) I paid it off as soon as possible, and then paused my debt elimination plans for a few months in order to stash $1,000 in the bank.

I didn't track my spending
One reason I was able to get so deep into debt was that I didn't track where my money went. It was like a black box. I just spent to my credit limit. Once I started tracking my spending in Quicken, problem spots became obvious. By tracking every penny I spent, I had a clear idea of how much I was actually earning and spending, not just vague guesses. (If I were starting now, I might use a web-based tool like Mint or Quicken Online.)

I tried to pay high-interest debt first
Most of the financial gurus give the same advice about debt reduction: eliminate your debts starting with the highest-interest rate obligation first. This makes sense mathematically, of course, but what these experts fail to understand is that debt isn't about math — it's about mental mistakes. If debt were about math, nobody would have it.

For years I tried to pay off my high-interest debts first, but I'd always give up. My high-interest debt had high balances, and it felt like I was never getting anywhere. Then I read about Dave Ramsey's debt snowball. Using this method, you pay off your lowest balances first. This allows you to knock out a few debts right away, which gives you a tremendous psychological boost. Once I learned about the debt snowball, I was able to kick debt to the curb.

(Another valid approach is to first pay off the debt that bugs you the most. Have a loan from your brother-in-law that you feel guilty about? Pay that off before anything else.)

I led myself into temptation
I like comic books. I've collected them since I was a boy. As an adult, I discovered I could pay $20 or $30 or $50 each for bound volumes that collected many comic books at once. I have a weakness for these books.

When I started to pay off my debt, I kept going to comic book stores. “I'll just look,” I'd tell myself. But the thing is, I didn't just look. I bought. Every time I set foot inside a comic book store, I'd leave with a book or two. Comic books were my kryptonite.

Your kryptonite might be bicycling gear or yarn or shoes. Whatever it is, avoid it. If you know you have a weakness, steer clear of situations likely to make you spend. Remind yourself of your goals.

I treated mistakes as if they were the end of the world
Nobody's perfect. I made mistakes all the time as I was paying off my debt. As I mentioned, I'd sometimes find myself buying comic books, or spending $80 on expensive bottles of Scotch whiskey. When I was starting out, I'd let these mistakes get me down. I felt like they derailed all the work I'd done. But that's not true.

Paying off debt is like playing baseball. You go out there and do your best every single day. You follow the fundamentals. If you make an error, you don't give up — you make the play next time. If you strike out, you forget about it and step to the plate for your next at-bat.

I spent raises and windfalls
I used to view raises and tax refunds as a license to spend more money. $1200 back from the government? I'd use it to buy a new bike. A new raise at work? Time to subscribe to more magazines. Or maybe I can afford that deluxe cable package. I was succumbing to lifestyle inflation — as my income went up, so did my spending.

After reading Your Money or Your Life, I realized that the smart move wasn't to increase my spending, but to decrease it. I cut magazine subscriptions and cable television. Instead of spending my tax refund, I applied it directly to debt. Sure, it would have felt nice to buy a new television, but it felt even better to say good-bye to another credit card.

I didn't seek help
Like an alcoholic, I hid my habit. Maybe “hid” is too strong a word, but because Kris and keep separate finances I was able to hide my debt problem from her. (This is one of the drawbacks to such a system — there are drawbacks to joint finances, too.)

I knew I had a spending problem. I knew it intellectually, and I could feel it in my gut every time I bought something with a credit card. But knowing you have a problem and doing something about it are two very different things.

About five years ago, a friend heard me complaining about my situation. He didn't scold me. He didn't moralize. He just gave me a book (the aforementioned Your Money or Your Life) and suggested I read it. I was lucky. Though I didn't seek help, help eventually found me. I could have saved thousands — tens of thousands! — by admitting I had a problem early on.

(Debtors anonymous was made for people like me.)

The final secret
The biggest secret of debt reduction? Getting rid of it feels awesome. After living in debt for twenty years, I've spent about eight months debt-free. The sense of freedom is euphoric at times. Psychologically, I'm a new man.

The thing is, most advice about getting rid of debt is purely theoretical. It's written by pros in suits who think that debt is all about crunching numbers. It's not. If smart money management were just about math, everyone would be rich.

But smart money management is mostly mental. It took me a long time to learn that. Once I figured that out, I felt okay ignoring the advice from the “experts”. I learned to play mental tricks on myself. That's what helped me get out of debt.

Thanks to Leo at Zen Habits for the original idea for this article. It was intended to be a guest post at his site while he was on his honeymoon, but I didn't get it pulled together in time. Instead, I contributed a “best of GRS” article: How I paid off $35,000 in debt, and how you can too. Photo by Dan Esparza.

More about...Debt, Psychology

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You know
You know
11 years ago

I went out on New Year’s with some (several times removed) friends a few years ago. I was appalled at the entry price to the club ($50), I was appalled they would order Grey Goose and a few other fancy drinks ($800), and I was appalled they were going to put it on their _mom’s_ credit card. I left right after the ball dropped before they could do any damage to me.

Unspender
Unspender
11 years ago

As someone just starting out on getting rid of her debt ($20,000 in mostly student debt), I’m encouraged by your post (and blog as a whole). I’m glad that I’ve already started an emergency fund and tracked my spending, but I’ve got a long way to go. I’m going to reserve that book at the library and hopefully, that’ll help prevent me from being discouraged.

Joel Carry
Joel Carry
11 years ago

Spending money is so easy and fun, but the moment your bank account starts to feel the heat, you begin to have feelings of guilt.
Why did I spend a lot of money on that thing that I don’t really need? When my first baby was born, I said to myself: I should start paying more attention to unnecessary spending. When you feel responsible to your child, you begin to notice that it’s time to be more careful and to calculate your spending.

Ted T
Ted T
11 years ago

That is a great point Joel. A baby or other life changing events can really put into perspective what really matters. I had a friend recently tell me that he looks at what a dollar is worth to him. He has to work 5 minutes to make that dollar. It makes it easier for him not to spend that money thinking of that.

Jen
Jen
11 years ago

Great post. One of the things that caught my attention though was something you mentioned off-hand: the fact that you and Kris keep separate finances. Now, I am not married myself, but I have always wondered about the couples who kept separate finances. I guess since that is what my parents do, it just seems like the natural way to do it. This could be a good idea for a post in the future: the pros and cons of separate vs. combined marital finances.

Noel
Noel
11 years ago

Your leading statement of the second paragraph intrigues me, “Because I’d grown up in a poor family, I had no notion of proper money skills.” What is the line between rich and poor? Is it a dollar figure or state of mind? The flip side of that statement would seem to suggest that if you grow up in a rich family you will possess proper money skills. I think we all can agree that is NOT universally true. I think the line between poor and rich is more about whether or not you are living within your means and your… Read more »

Noel
Noel
11 years ago

In response to Jen’s desire for a post on the pros and cons of separate vs. combined marital finances…

Which Should You Choose: Joint or Separate Finances?

Jen
Jen
11 years ago

Doh, didn’t think to check the archives. Thanks Noel.

J.D.
J.D.
11 years ago

Noel is right. He’s absolutely right. People raised poor can have good money habits. And there are plenty of people raised rich who do not. I should have made that clear.

In my case, however, I had absolutely no concept of how to manage my money because I’d never seen smart money management modeled. I learned about business ownership, but I also learned how to spend everything I earned. Mom and Dad did their best, I’m sure, but ultimately all three of their sons have struggled with money because they didn’t have a sound introduction to the subject.

Evelyn Lim
Evelyn Lim
11 years ago

Oh my…it sounds like you’ve been in a lot of trouble previously. Well, thank God you are out of it and got your life straightened out!

Evelyn

Sarah
Sarah
11 years ago

I grew up in a comfortable, middle class family. We didn’t have to struggle, and we always had our needs met. However, my parents overspent and had significant debt (from what I could tell at the time). There was no concept of spending less than you earn. The result is that I learned those money-management skills, and now find myself in debt, too.

Note: I am not blaming my parents for my poor financial decisions. I am just saying that my first lessons about money were unhealthy ones.

smartfather
smartfather
11 years ago

One of the biggest revelations that my wife and I have made has been to not listen to what everyone says about paying off the high interest cards first. We have started the snowball method and it works brilliantly! We’re actually getting somewhere. Do what works for you.

NH Mom of 3
NH Mom of 3
11 years ago

This is a *great* article. I always find motivation and inspiration from “real people stories” and not just what the “experts” say. I can totally relate to your background, as I fall into the same boat and I have made some of the same mis-steps that you have listed. I am ready to move forward and need to find ways to “drink the Kool Aid” as Dave Ramsey says…as we just haven’t yet. We’re going through a bit of a tough time financially and emotionally with a job loss and are struggling on how best to move forward. Articles like… Read more »

Jessica
Jessica
11 years ago

These are some great tips. I have been very fortunate, my parents taught me money management skills at a young age (my mom being a banker helped). I barely ever use credit cards (only a couple times a year, on big purchases like vacations) and I pay them off when the bill comes. Actually, the only reason I use the cards at all is so I can keep my credit high. If possible I like to use cash for everything, or at least my check card.

expat
expat
11 years ago

Great post J.D.! I’m going through much of that myself now, and I hope to one day soon experience that euphoria of knowing that I am successfully debt free. I’m at the beginning of my trek, but feeling good about it.

The most important point you made? About not beating yourself up when you make a mistake. Try, try again. It’s the only way to success!

Laura
Laura
11 years ago

Great post. I am interested in yours and everyone’s opinions about aggregation services like yodlee, mint, and wesabe, mentioned above. I did some reading on each of the sites, and my security concerns weren’t really abated. To clarify–you have to put all your bank account info on these sites. I’m hesitant to even buy things with my c/c online. Any thoughts?

Richie
Richie
11 years ago

I have plenty of silly addictions that waste my time and money. But I don’t get comic books.

What do you do with them? Do you actually read the comic books? Just look at the pictures? Just collect them?

Cathy
Cathy
11 years ago

I “snowballed” all of my debt into one 0% balance transfer offer on my credit card. I had to pay transfer fees, but they came out to be significantly less than what the original interest rates would be. When my balance transfer rate expired, I transferred the balance to the next lowest rate balance transfer offer. I did this for the better part of 3 years. Unfortunately, finding 1.99% or less balance transfer rates has all but disappeared these days. Fortunately, I paid off all my debt in February this year before the credit card companies started getting really nasty… Read more »

Chris
Chris
11 years ago

I cannot believe the mental acrobatics people will go to in justifying ‘snowball’ debt reduction schemes, but the “it is good psychology” excuse bugs me the most. Instead of using ‘good psychology’ to enforce a bad habit, use the good habit (ie: paying off in the optimal order) and if you really need it come up with some system to enforce the good habit. Try drawing a poster. Chart a line “where I am now in my debt reduction”. Draw another line “where I’d be if I’d fallen for that Ramsey drivel and not been paying down the high interest… Read more »

oldmiter
oldmiter
11 years ago

“If debt were about math, nobody would have it.” No, no, no, no. The debt I have IS about math, and that’s WHY I have it. I chose my debt to go to a school where I could get the best education in my field possible. It was crazy expensive. I financed it on my own by taking out loans and putting a lot of it on credit cards. I came out with $55K in student loans and $20K in credit card debt. I used this debt to get pretty close to my dream job. You know, that SL debt… Read more »

Jason
Jason
11 years ago

There is another way to payoff debts that can be very useful sometimes and that is to pay off debts that require the lergest payments first. We had about $10k on a zero interest loan and $10k on a credit card at 9% or so. The loan required a payment of like $900/mo, but the credit card only $200 or less. Makes mathematical sense to put any extra money on the credit card and wait for the loan to be fully repaid in about a year. However, every time we had some extra money we would put it on the… Read more »

partgypsy
partgypsy
11 years ago

Richie, I think comics as a medium are undergoing a growth period in their creativeness, diversity, and literaryness (if that is a word ;)). It’s not just superhero stuff. Unfortunately the library only carries a fraction of what’s out there, so the only recourse is to buy it. To save on that, my husband has started an informal lending library with a couple of his friends, where they let him read the new stuff they have bought and he lends out a chunk of his older comics to them.

Jib
Jib
11 years ago

It is always so encouraging to hear you tell stories of where you were and where you are now. I have learned myself that, just as you said, money management is mental.

I look forward to the day that I am out of debt and can feel that freedom. To know that no one owns me.

LC
LC
11 years ago

oldmiter – Your point is well taken. Many loans are smart tools for someone with good credit who can get those interest rates. However, when you took out the loan, you had no guarantee that you would be in the strong position you are now. A friend of mine took out $100k in student loans to go to the best school for his field, and now works for $25,000/yr because he can’t find anything better. I think the original comment meant that for the majority of people, taking on debt means that you don’t have enough money to pay for… Read more »

MaryMR
MaryMR
11 years ago

Hi-I subscribe to your blog but never comment. Just too busy most times, but I’m breaking silence here. Wow: this post *really* hit me right where I live right now, more so than any other post I’ve read here. Hearing you mention the EXACT pitfalls I’m experiencing and that you still got out of debt is so good to know. I’ve really been struggling with the saving $1k for emergencies. I ‘thought it didn’t apply to me’. TOTALLY. And now I get it. In the last year, I have reduced my debt a little (the total is less than it… Read more »

bethh
bethh
11 years ago

The comments on the post from the 3rd of July, Financial Success Stories for the Fourth, inspired me to take on my last chunk of debt head-on: I’m pillaging my travel & emergency funds to cut my student loans nearly in half (don’t fret, I’ve left 2k in the e-fund), and I’m going to hit them hard for the rest of the year. I can definitely get them paid off by next spring; I’m hoping to go faster than that! It really IS about the math – I’d convinced myself that the loans were “okay” debt since they’re at a… Read more »

Tony-A.
Tony-A.
11 years ago

Wow, I am at the start of my debt reduction cycle and it’s great to read this type of article. As someone else said already it’s fine to hear what the experts say but true life stories are better motivators for myself. 20,000 in credit card debt seems like so very much. Makes my 4500 seem almost non-existent. One thing I would like to note though is your details about separate bank accounts. My wife and I got married earlier this year and until then we had kept separate bank accounts as well. But afterwards we created a joint account… Read more »

oldmiter
oldmiter
11 years ago

@LC I get what you’re saying too. I think emotions come into play with finances when people delude themselves into thinking that everything will work out OK, they make no plans for contingencies, and just ignore their situation and get deeper in debt. It’s only after they get a real scare or hit rock bottom, that they get the personal finance religion. A lot of times, these people then go a little too off-the-reservation extreme for me, when it could have all been avoided by not discounting the math. It would have been terrible for me to end up without… Read more »

Richie
Richie
11 years ago

“where I’d be if I’d fallen for that Ramsey drivel

Why the venom for Dave Ramsey?

Sean
Sean
11 years ago

Greetings from a fellow Milwaukiean…just wanted to comment that a lot of what you described as obstacles to financial well-being either reflect or run parallel to my own experiences. Namely, growing up around all the worst examples of money handling and failing to overcome them, giving in to college credit temptation, having neither a plan nor any emergency money, and spending way too much time and money nurturing consumerist weaknesses. Only, instead of comics, my crack of choice were media…CDs, DVDs, video games, etc. I’ve finally put my fiscal foot down and am starting the long road back, and posts… Read more »

Chris
Chris
11 years ago

@Richie “Why the venom for Dave Ramsey?” Say you’ve got a Visa at 10% interest with a balance of $1,500. Now throw in a line of credit from Dell or whoever at 24% interest with a balance of $2,500. After cutting out the overpriced-steamed-milk-and-coffee let’s say you’ve got $100/month on top of the minimum payments ($15 and $25 let’s say). How much money are you going to waste on a snowball compared to taking down the high-interest debt first? Now imagine how big that amount of wasted money would be for someone with more debt than that… Now multiply that… Read more »

Ryan McLean
Ryan McLean
11 years ago

What I am so excited about is that it is not going to take me 10 years to work out the things you worked out. They are right here on this page!
I am 20 years old and I don’t have a credit card and I believe that I can learn the skills now that you have been learning so I can become financially secure, rich and be able to retire early. So thanks for the post

deepali
deepali
11 years ago

I think it’s not just about being poor or rich, but about being involved in family money decisions.

My family was pretty well-off and my mom has great financial skills. Somehow, I didn’t seem to inherit them! When I finally got my act together, I had a large amount of debt.

J.D.
J.D.
11 years ago

Chris, while I respect your opinion, I think you’re missing the point. The advantage of the debt snowball is that it works. It doesn’t matter whether it costs a little more. People get their debt paid off with it. I did. So have many others. Did it cost me a few hundred dollars extra? Perhaps. But it cost me thousands of dollars extra to keep trying and keep failing with the high-interest first method. There is no one right way to pay off debt. To argue that there is discourages people from using options that might actually work for them.… Read more »

lukeFace
lukeFace
11 years ago

One way I like to thing of time vs money is… Spend money to save time; spend time to save money. I use the eating out as the best example. I can eat out have a meal made for me and it doesn’t take a lot of time. The other side is I can stay same and make my own four course meal over 2 or 3 hours. I can spend money to use someone elses time or spend my time to save that money. It all depends on the preference though. It is still nice to eat out but… Read more »

Finn
Finn
11 years ago

*There is no one right way to pay off debt.* I have to disagree with this entirely. There is a right way to do it, or an optimal way, if you prefer. My personal feeling is that if you don’t have the willpower to truly make those decisions to do so, then you are committing the same lack-of-will that the ‘debters’/overspenders/etc are doing. It’s like saying there is no right way to invest, when massive amounts of people would jump on anyone who says high fees are acceptable. It’s like saying that investing in GICs is a good tradeoff against… Read more »

Angie
Angie
11 years ago

“Because I’d grown up in a poor family, I had no notion of proper money skills.”
Not sure what you mean by this. Poor families can have very good money skills. They can make the very most of what they have, and still be poor.

Jeff
Jeff
11 years ago

My girlfriend used the snowball method and it worked great for her. She kept up with her other minimum payments and then started destroying her smaller debts.

She was so into it that she paid off a $400 credit card in little more than a month. She said that thinking about only one of her debts at a time made it easier to get excited about paying it off.

John of Indiana
John of Indiana
11 years ago

I just paid off my credit cards, and for the first time in almost 30 years I am debt-free.
Nothing but rent, utilities and the other monthly things.
So, when do the good feelings kick in? Seriously, I’m not getting a buzz from it.
It was a mistake to get that far into the hole, and all I did was fix the mistakes, and for that I’m suppose to feel like dancing?

Shirley
Shirley
11 years ago

Great post. Anytime you get such lively discussion, you know it’s a good post, JD. I think money is all about emotions, whether it’s feeling good about paying off debts through the snowball method (a method we used years ago before Ramsey–just knowing we’d have less bills staring us in the face and could apply more to the remaining ones as some were eliminated), hating money, loving money, etc. I know Suze Orman gets dissed here a lot and I understand why, but her musings on how our feeling about money and how we’ve seen what money represents emotionally growing… Read more »

Cathy
Cathy
11 years ago

I totally understand the reasoning for debt snowballing for the psychologic effect, and in most cases I would absolutely agree this would work. However, being a mathy type person, I couldn’t help but do a little research on Chris’ scenario. Under the conditions he listed: Acct #1 $1500 balance 10% interest $15 minimum payment versus Acct #2 $2500 balance 24% interest $25 minimum payment $100 to throw at the balances Using an amortization calculator, in this case a debt snowball in its simplest form is a bad idea. Why? Because if you throw all that $100 at the lowest balance… Read more »

Alslayer
Alslayer
11 years ago

This is my favorite article you have written. I will print it out and send it to my girlfriend.

Chris
Chris
11 years ago

J.D., I love your blog and have been reading it religiously for some time now, but this is a point where I’m going to continue to disagree with you. The first point I would make is that it was not the snowball which paid off your debt; you did. You acquired and exercised the needed discipline, not the snowball. The snowball worked for you, yes, but it worked for you because you let it — just as paying off your debts in the optimal manner would have worked for you if you’d let that. Now I will grant that it… Read more »

Richard
Richard
11 years ago

There is a right way to do it, or an optimal way, if you prefer. … if you don’t have the willpower to truly make those decisions to do so, then you are committing the same lack-of-will that the ‘debters’/overspenders/etc are doing. Right and Optimal aren’t the same thing. While I lean towards the mathy side (highest interest first), as long as both methods end up paying off the debt, a good thing has happened. I listened to the Dave Ramsey show four or five times. Some of his callers stories fit the stereotype of trailer park high-school dropouts working… Read more »

Cathy
Cathy
11 years ago

Chris: Actually, my point might have been a little obtuse. I was actually trying to point out that people should make sure to do their research when tackling their finances, especially debt. I think debt snowballing can be great, but taken at its face value, it could work against you, as the example of just blindling throwing all extra money at the lowest account. When I was looking at my debt strategy, I ran all kinds of numbers to make sure I knew what I was getting into. What worked for me was consolidating all my bills onto the lowest… Read more »

Chris
Chris
11 years ago

Cathy: It doesn’t change the fact that I presented you with a busted toy problem; consumer lines of credit like Dell offers don’t generally allow for payments so small that they don’t service the principal. Egg on my face.

Finn
Finn
11 years ago

While I lean towards the mathy side (highest interest first), as long as both methods end up paying off the debt, a good thing has happened. I would say the right way is the optimal way, assuming you can properly address all costs and risks. Course, we can’t, which is why we have this debate. However, this logic doesn’t sit well when the general advice from the same people are about slicing every single cost, as much as possible. Chris mentions high interest savings accounts, and I agree. The same can be said here – so long as people save,… Read more »

mimms
mimms
11 years ago

Something that has been left out of the equations above is that it’s not just the amount of debt you have that decreases your personal security – and therefore quality of life – it’s also the number of accounts you have. So, I elected to pay off lowest balances first for a specific reason: it improved my quality of life to reduce the number of companies who “owned” a part of me. To be fair, my interest rates didn’t have nearly as wide a spread as the examples above. Now, I predate this Dave Ramsey fellow you all are talking… Read more »

Odd Lot
Odd Lot
11 years ago

Wow, GREAT article, JD! It’s going to become an authority document in no time, you’re going to get a 1,000 links from this post. Very honest and compelling, it’s amazing that you can write so many posts per month but still keep the quality level so high. I agree with you on Ramsey’s snowball approach, it’s my favorite and the one I recommend the most to beginning wealth-builders that are struggling with debt. I’ve seen people that have struggled with their debt for years turn their lives around pretty quickly with this method. Who cares about paying on the card… Read more »

Kathy
Kathy
11 years ago

JD: Great post. I read you every day and this article really put it all together in no uncertain terms. Thank you for writing it!

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