“Getting Out of Debt—for Good,” Ensign, July 2011, 62–66
Getting Out of Debt—for Good
Alex* took a deep breath as he drove down Main Street, his pulse and mind racing with bittersweet exhilaration. With the windows down and wind blowing through his hair, he shifted into third gear and savored the seamlessness of the gear transition in his brand-new car. It felt good to be rid of that ancient beast of an automobile he had inherited from his parents. Alex thought to himself—not for the first time—that his purchase might even help him get a few more dates. Besides, he was 24 and had just one year of school left. “I deserve it,” he thought. But the next thought wasn’t quite as pleasant: “The car may impress some people, but what would they think if they knew how much debt I’m dragging around with it?”
It wasn’t only the debt of the new car that worried him. His credit card statements, maybe five or six of them, had a balance of a few hundred dollars each. One even had a balance of more than $1,000. He had done the math and knew that even if he applied every cent he made at the part-time job he had taken to get through school, it would take months to pay off those credit cards, and that wasn’t including any interest or other potential fees. To top it all off, he had several student loans he had used to pay for tuition, books, and some living expenses.
This reminded Alex of a newspaper cartoon he had seen that showed a 90-year-old man telling his wife after mailing a letter, “Now that we’ve finally paid off our student loans, we can start saving for retirement.” Alex smiled. It was only a joke, right? It couldn’t really turn out that way, could it?
You Will Be Happier
Like Alex, more and more people today are drowning in unmanageable debt. President Thomas S. Monson has warned against excessive debt. He says it is commonly accepted in today’s culture, but we will be happier by living within our means than we would be if we were “constantly worrying about how to make the next payment on nonessential debt.”1 Elder Marvin J. Ashton (1915–1994) cited statistics showing that nearly 90 percent of divorces could be traced back to quarrels and accusations over finances.2 When a single adult accumulates debt and later brings it to a marriage, the debt is likely to become an instant wedge between spouses.
Of course, because of the Atonement of Jesus Christ, we understand that there is always a path of redemption, as long as we make a firm and unyielding commitment to follow the path He would have us follow. A later reprinting of Elder Ashton’s talk included a debt-elimination calendar that can help us quickly and permanently rid ourselves of the bondage of debt.3
Where to Begin
The first step, and the most important factor in debt elimination, is a firm commitment to reject debt.4 A debt-elimination calendar will simply not work if new debts continue to be added to the old. This change in attitude is not subtle or gradual but rather resembles the flip of a switch—it’s a resolute determination to make a clean break from the culturally accepted addiction to debt.
As a personal finance educator, I find it tremendously rewarding to see this light “switch on” in others. For instance, a student who attended a series of community-education finance classes announced enthusiastically on the last day of class that during the previous month she had taken some extra jobs and used tax-return money to pay off five credit cards and two department store cards. She had also opened a certificate of deposit and started a savings account at her bank. This student became a living embodiment of the wise statement that those who understand interest earn it rather than pay it.5
A Simple, Effective Method
Although there are many approaches to debt elimination, my own experience with teaching has shown that the debt-snowball method, which arranges debts from lowest to highest balance rather than highest to lowest interest rate, can be an extremely motivating way to confront and eliminate debt. This method is simple. Arrange your debts from smallest to largest. Make the minimum payment on all debts each month except for the smallest one: on that one, pay as much as you can. Once it is paid off, roll the regular payment you had been paying on that debt to the next-largest debt until it is paid off. Continue the process until the payment “snowball” has grown so large it quickly knocks out debts that stand in its way.
The following example shows this method. The last line indicates that the total debt payment will always be $646, but as the smaller debts are eliminated, more and more of that amount is applied to the next-largest debt.
An Example of How the “Debt-Snowball” Method Eliminates Debt
July 2011
Arranged from smallest to largest balance.
|
Debt |
Balance |
Payment |
Rate |
|---|---|---|---|
|
Family Loan |
$150 |
$50.00 |
0 |
|
Credit Card 1 |
$323 |
$8.00 |
17.9 |
|
Credit Card 2 |
$356 |
$8.00 |
24.9 |
|
Credit Card 3 |
$402 |
$12.00 |
19.9 |
|
Credit Card 4 |
$435 |
$13.00 |
18.9 |
|
Credit Card 5 |
$629 |
$17.00 |
14.9 |
|
Credit Card 6 |
$1,350 |
$30.00 |
13.9 |
|
Student Loans |
$2,360 |
$58.00 |
4.7 |
|
Auto |
$18,670 |
$450.00 |
7.5 |
|
Totals |
$24,675 |
$646 |
October 2011 (3 months later)
|
Debt |
Balance |
Payment |
Rate |
|---|---|---|---|
|
Family Loan |
$0 |
$0 |
0 |
|
Credit Card 1 |
$313.31 |
$58.00 |
17.9 |
|
Credit Card 2 |
$354.12 |
$8.00 |
24.9 |
|
Credit Card 3 |
$385.73 |
$12.00 |
19.9 |
|
Credit Card 4 |
$416.26 |
$13.00 |
18.9 |
|
Credit Card 5 |
$601.09 |
$17.00 |
14.9 |
|
Credit Card 6 |
$1,306.41 |
$30.00 |
13.9 |
|
Student Loans |
$2,213.16 |
$58.00 |
4.7 |
|
Auto |
$17,663.80 |
$450.00 |
7.5 |
|
Totals |
$23,253.88 |
$646 |
April 2014 (33 months later)
|
Debt |
Balance |
Payment |
Rate |
|---|---|---|---|
|
Family Loan |
$0 |
$0 |
0 |
|
Credit Card 1 |
$0 |
$0 |
0 |
|
Credit Card 2 |
$0 |
$0 |
0 |
|
Credit Card 3 |
$0 |
$0 |
0 |
|
Credit Card 4 |
$0 |
$0 |
0 |
|
Credit Card 5 |
$0 |
$0 |
0 |
|
Credit Card 6 |
$0 |
$0 |
0 |
|
Student Loans |
$620.34 |
$196 |
4.7 |
|
Auto |
$6,496.26 |
$450.00 |
7.5 |
|
Totals |
$7,116.60 |
$646 |
Using the numbers in this example, the snowball method could save someone $1,173 and reduce the time it took to pay the debts by almost seven years.
No matter what approach we take to debt reduction, an attitude change and firm commitment to reject debt is the most valuable action we can make. It’s about overcoming the accepted cultural norm of attaching debt to everything we buy. Words of our prophets6 that are decades old are now being verified by the opinions of countless personal finance experts who agree that only three types of debt are wise or economically justifiable:
-
A mortgage on an affordable house.
-
Loans for college degrees or training that are accompanied by higher expected earning increases.
-
Loans for certain well-thought-out business plans.
Even in situations where debt may be economically justifiable, you will likely be better off including the debt in your debt snowball and paying it off sooner rather than later.
We live in a day when the adversary is using his most cunning tools in an effort to destroy our spirituality. Debt could put us into predicaments of choosing either to honor debts to our fellow men or to pay tithing, for instance. No man can serve two masters (see Matthew 6:24), and in trying to do so, we can hinder our spiritual growth.7
On the other hand, as we permanently remove debt from our lives, we will find that a portion of our agency has also been restored. Our Father’s plan of salvation is also a plan of agency. We should never willingly forfeit even a portion of that agency by being bogged down by unnecessary debts.
The car may impress some people. But Alex wondered what they would think if they knew how much debt he was dragging around with it.
Eliminating the smallest debts first increases motivation and has a “snowball” effect that is highly successful.
Illustrations by Casey Nelson