How to Pay off Debt

by Adam on April 12, 2013

How to pay off debtFocus.

Mastering financial focus is really important if you are to be prepared to grow your savings and begin investing for your future.

You already know that you do your best work when you take the time and focus. With focus you can achieve great things. But focusing is hard.

One minute you could be reading about the power of focus then…something else comes up. But focus is important when it comes to paying off debt and growing your pennies. I won’t need to tell you that there are lots of distractions that can part you from your pennies and there’s also lots of different priorities that can make reaching any financial goal difficult.

Here are some techniques and strategies to help you remain focused on your financial goals:


Short Term: Paying off debt and building some savings

Paying off debt is the first thing you need to do if you’re to grow your pennies. Why? Because, simply, it’s so expensive! Paying off debt could include credit cards, car debt and other small loans you may have (although not Student loans at this stage). If you’re going to be successful at focusing on paying down your debt there are 3 strategies that could help you maintain focus on your debt management plan.


Technique 1: The Debt Snowball

Popularised by Dave Ramsey this strategy to remain focused involves writing all your debts down in order from smallest debt to largest debt:

Debt example:

£100                Dentist                           5%  interest

£500                A friend                         0%  interest

£2500              Credit cards                27% interest

£12000            Car loan                       7% interest

Whilst making minimum payments on all of the debts, if you’re following the Debt Snowball plan, you begin putting any extra money you make available in your budget towards the smallest debt. By focusing on the smallest loan you can quickly get the first two in the list paid off. Once this is done you’ve now cut your list of debt in half and can ‘snowball’ that extra money that you had been paying on those debts into attacking debt #3, the credit card. This method helps you stay focused because you begin seeing progress straight away and once the little debts have been paid you quickly have more money available to begin paying off the bigger debts. By the time you get to the last debt the debt snowball is in full effect, feeding off your previous successes.

The Debt Snowball is certainly a powerful tool to help give you focus because it’s a plan that gives you quick results.

Technique II The Debt Avalanche

Did you notice that in the Debt snowball method the interest rate wasn’t considered? This is because the Debt snowball focuses on debt balance  for the ‘quick win’ of paying off small debt. Quick wins are a great way to help maintain focus.

In contrast, the Debt Avalanche (I love these names!) is based solely on the interest rate, and nothing else. Using this method you can take the same debts and order them in interest rate order: the price you are paying to carry the debt:

Debt example:

£2500              Credit cards                27% interest

£12000            Car loan                       7% interest

£100                Dentist                           5%  interest

£500                Friend                          0%  interest

Credit cards are often the most costly form of debt and in this example it’s 27% interest rate is a costly expense. After paying the minimum monthly payments on all the debts, the Debt Avalanche method demands that you concentrate on paying off the highest interest rate debt, the credit card in this example, first. Once complete you would then move onto the car. Those other ‘cheaper’ debts will have to wait.

Despite being the optimum method of paying off debt from a cost perspective, the Debt Avalanche can be the hardest strategy to remain focused on –sooner or later you are going to tire of throwing your money at the debt every month without seeing any meaningful progress. Reducing a £1000 debt to £900 does not have the same phycohlogical boosting effect that paying off a £100 debt does. On larger debts such as a  large credit card balance or a car the size alone can make paying it off a very unappealing idea.

However Flexo @Consumerism Commentary gives a great suggestion in cases like this: rather than focussing on the number of debts paid off, focus on key milestones: the first £500 paid off, the first £1000 for example. Keep focused by keeping your goals short-term –and celebrate when you reach them! You may still be in debt but if you’ve paid off your first £1000 you’ve made excellent progress on your path towards growing your pennies. It might seem contradictory to celebrate (and spend a little) when you are still in debt but you should recognise the psychology of the process to help you stay focussed.

Technique III -the Debt Tsunami

So to recap, the Debt snowball orders debts in balance size order for those ‘quick wins’ quickly reduce your list of accounts and simplifying your financial life; the Debt Avalanche optimises the cost of the debt by making you prioritise high-cost debt first before moving onto others. So far, so good. But I’ve recently become aware of another technique for staying focused when paying off your debt that I’d love to share with you:

The Debt Tsunami (coined by Adam Baker) works in the same way as the Debt Avalanche but includes a great tweak: Consider both the interest rate and it’s emotional impact:

Debt example:

£500                Friend                          0%  interest                   BIGGEST Impact

£2500             Credit cards                27% interest                Impact

£100                Dentist                          5%  interest                  A little impact

£12000            Car loan                      7% interest                  No  impact


In this example, owing money to a friend is having a big impact-it has changed the dynamic of the relationship. This is hardly surprising: although borrowing from family and friends may seem the ‘easy’ way to get money if you need it, it’s not generally a good idea. The Debt Tsunami takes this into account, pushing the ‘cheap’ loan above the credit card debt in the priority list. The dentist loan also has a bit of emotional impact: perhaps in this example you don’t want to be asked about the loan when you go for your next check-up. You therefore move it up ahead of the car loan, despite the lower, and therefore cheaper, interest rate.

By working on the debt that makes you feel the worst emotionally you harness those negative feelings to give your debt reduction plans an incredible amount of focus. This focus will eventually take you out of debt and prepare you to begin seriously growing your pennies.

Now that’s a great thing to focus on!

What techniques have you found useful when paying off your debt?

{ 6 comments… read them below or add one }


Very good post Adam. The psychological aspect of debt is so important and so often overlooked. But there is one thing that infuriates me (and I’m sure @RightlyKnightly will agree here) – your constant refusal to see a student loan as a debt just the same as ANY other!

Sure, it *shouldn’t* decrease in value in real terms. But it is still a more expensive debt than any 0% interest debts you may have, which actually decrease in real terms as time goes on.

For me, student loans are an expensive and unwanted debt. They are also my smallest debt. Psychologically, it’ll give me the most pleasure to pay off. And when it is paid off later this year, I’m going to ‘snowball’ the money into my larger training loans.

So Adam, I put it to you, that your student loan is the elephant in the room. Why should it be treated differently to other debt? It has an interest rate. It needs to be paid off. You aren’t going to reach retirement age with it still there to be written off, so there’s no benefit to be had there.

If you were practising what you were preaching, you’d be calling the Student Loans Company first thing Monday and offering to settle up.


Well, for the first time in about 4 weeks I have to say I’m with Pip on the Student Loan issue. I’ve taken it, and that’s that (although in retrospect, I might have better investigated ways to not at least have maxed out the £12k). Therefore, it needs paying back, because it’s debt. But, in terms of psychological and financial impact I can see why Adam takes the approach he does.

Nobody is going to break my legs if I don’t repay it back at a certain rate, and the repayments are quite well geared to earnings. True, it would be nice if it was genuinely 0%, but as many people will sit on them for years, I can see why the SLC don’t see that as a sensible business strategy.

Obviously, I would rather have an extra £xx a month, but the automated repayments mean it barely exists in my monthly budgeting. Much the same as my pension contributions, they were always there from day one, so the payslip never *actually* changes as you respond to debt. I’m a fan of the tsunami model, as that brings in the psychological choice element best about how I have to choose and respond to repaying my debt, based on the impact it is having on my financial freedoms. That was never there with the SL.

It’s a graduate tax in all but name, rather than a stereotypical debt.


Thanks Sean for the passionate comment and Jon for responding so well.

Sean, I could pay off my student loans today but as I wrote in my post about Student loans, they *are* different because they have no risk attached.

By paying off the loans today I would have very little left. You seem to imply that to ‘practice what I preach’ would be that I should eliminate and avoid all debt. This is not true. Also this, for me, would not be possible as I intend one day to aquire mortgage debt as I imagine most of my readers will too.
As you wrote yourself in a previous comment, not all debt is equal and it depends entirely on the interest rate. By paying off student loan debt (that largely follows the rate of inflation) I would need to borrow more when the time comes in the form of a mortgage, at an almost certainly higher interest rate.

As Jon wrote, in the UK, student loans really are more of a gratuate tax given that I have no liability in the event that I stop earning.


Okay, so I was playing devils advocate here really again. However…

The fact that you have a signed loan agreement on a commercial loan can be a reassuring thing – both parties know the firm conditions of the loan. Students have no such agreement with the student loans company. In fact, central government are free to set the terms not just of new loans, but all existing loans as well. Tory plans before the previous election aimed to up the interest on student loans to a commercial rate ( ) and the policy remains a possibility now. Given the perilous state of the public purse, I don’t think they’d blink at applying these rates retrospectively.

Of course, the link between repayment and earnings remains. But what’s to stop a future government severing even this? Without this turning into a political rant, I think we need to consider how much we trust this or any future government….. ?

Rightly Knight

Without risking to alienate pretty much everyone who will ready this I think Jon and Adam think loans are a good thing because a) the amount they pay each month is paltry, b) they had good experiences of uni and c) they didn’t have a dramatic wage rise.

With a) – there is a definate point where it begins to piss you off when you pay it. As a temp I started paying the odd £1 every week a couple of years ago. This meant nothing as what can one do with £1? Bugger all.

with b) your experience of uni and the outcome (how successful in the career place you are) will have a big effect on whether you see ‘worth’ in your loan. I argue that for most they ignore this and if, truly, thought about it would be a worthless experience in ones occupational life (ignoring the friend/drunken aspects).

finally c) both Sean and I have experience rapid wage rises. We’ve both come from little money to a fair sum so we both know the value of money. Although Seans grasp of this value is quickly disappearing the £100+ a month he and I suddenly found ourselves paying for something worthless was a pain in the backside.


@Sean -Governments are controlled by the people and changing the terms on student loans retrospectively would be political suicide. At least I hope so! Certainly food for thought though Sean. Thankfully due to Magical Penny strategies I would be in a better position to react *if* the terms change. Until then though, I’m not going to worry about what *could* happen, but rejoice in the interest free loans that enabled an enjoyable 3 years of university.

It may be difficult for students today but now that tuition fees are here to stay I’m sure there will be new generation of parents who will be saving for their children’s higher education as is the case in the US.

@Rightly Knight – I can’t say that university is a worthwhile experience for everyone, but certainly for me university gave me 3 years to prepare not only to enter the workforce, but to enter a well-adjusted adulthood. I accept that my positive experience of university allows me not to feel resentment about paying back my student loan.

That said, new students will no doubt be looking for greater value from their university than I did -for example I wouldn’t be happy paying over £3000 for 4 hours a week of tuition a term, the amount of contact time I had in my final year.

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