The best way to pay off that debt - Limerick financial planner

THE trend of Irish people paying off debt has accelerated over the past number of years. Back in 2016 we were the fourth most indebted country in the EU but we have improved significantly and now our debt-to-GDP is about 24%.
Which is actually very good when you compare it to the likes of Switzerland and Holland and Norway and Sweden whose debt to GDP all exceed 80%.
Anyway, we all carry debt for any number of reasons but the two I come across most often are (a) poor spending behaviours and decision making and (b) a lack of preparing for the unexpected i.e. unemployment or an unexpected illness or a new addition to the family or divorce or separation or educational costs etc.

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Regardless of the reason why people end up having to borrow, everyone would like to be debt free as fast as possible but unfortunately the majority of people I come across are going about it the wrong way, especially those who have multiple debts.
They want to pay it off as quickly as possible and are trying to, but at times they end up frustrated because of their lack of progress and this frustration leads them to giving up altogether. It can be very disheartening when you are paying more than you need to each month but despite your efforts, you’re still making very little impact so you ask yourself, why bother.
And the reason people aren’t making progress is because the strategy they are using is the wrong one.
In the financial industry, the strategy I’m referring to is known as the Shotgun method of repayment.
And the reason it’s called shotgun is because if you fire a shotgun you release a number of pellets and the idea behind doing this is that by peppering your target area you increase your chances of success and are more likely to hit your intended target.
So, when you are trying to attack all of your debts in one go you pay a little more than you need to on each debt but the difficulty doing this is that you are getting nowhere fast.
You would be much better off if you concentrated all your efforts on clearing one debt at a time.
And when it comes to choosing which debt you should focus all of your energy on first and if we were to look at the numbers only, it would suggest you should focus on the debt that is costing you most i.e. the one with the highest interest rate.
From a financial perspective this is the best way to pay off debt and it’s known as the Math method.
And each debt you have has its own interest rate. Some may have a rate of 5% and others 12% or even more depending on the type of debt. And of course the higher the interest rate the more money you’ll end up paying back. So, it makes sense to focus your attention on the loan with the highest rate.
But this method has its drawbacks as well with the biggest being ourselves.
Let me explain.
From a financial perspective we know it makes sense to focus our energy and surplus monies on a high charging loan but if we don’t feel we are seeing immediate results particularly if the term of the debt is quite long, we might abandon it altogether and just default back to the original repayment amount.
The good news is that there is a method that can counteract this which takes account of human behaviour and our need to see quick and immediate results and it’s known as the Momentum Strategy.
This strategy gets you to focus on the debt which has the shortest term remaining.
So, forget about what rate is being charged, re-order your debt from lowest term remaining to highest and any surplus money you have is to be directed in that order.

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By arranging your debt this way you will see quick results and once the first loan is paid off, you move that previous payment to the next loan with the shortest term and once that loan is paid off you move that payment to the next and so on.
What you are doing here is building momentum with small debt payment victories.
Regardless of what strategy you use, the key to paying off debt quicker is paying more than you are asked to each month. And in order to do this you need to create or find those surplus monies.
And there is no better weapon to clearing debt than by creating a budget.
I heard a great description of what a budget can do for you recently where it was likened to turning on a light in a darkened room – you can see your way around it for the first time.
And whether we like hearing it or not, a budget really does shine a light on what you’re spending your money on each month and helps you make better decisions. It also highlights and makes sure you are spending money on things that are important to you.
A really good starting point for anyone who wants to understand what their priorities are, is by looking at where their money goes each month. And in this regard when I talk to people about this I tell them that it’s important that when they record their monthly outgoings, that they aren’t just guesses, they need to reflect what their reality is. And the best way to ensure this happens is to record what you are spending your money on preferably for two to three months.
And you might think you know where it’s going but when people take the time to monitor and see where it actually goes they’re always surprised because it doesn’t match up to where they thought it was going and is often in conflict with what their priorities are.
A woman told me recently that her priority was to save enough to put her eight year old child through college when she is older if that’s what she wants to do, but when she recorded what she was spending her money on, she discovered that she was spending more on clothes each month than she was saving into an account for her daughter.
And that was a big revelation to her and one that she was mad at herself for.
But it was also her trigger to do something and that something was to identify areas where she could save or cut back on and move that money into her daughter’s future college fund account.
And some of those areas she cut back on were things like, the amount she spent at lunch in work, spending less on clothes and getting better premiums on insurance premiums. And she followed through because she had a reason to and she said the changes she made were small but the impact they were going to create were big.
And getting back to the topic in hand, if you are committed and really motivated to becoming debt free as fast as you can, in the majority of cases I’ve encountered people create that surplus by being mindful and intentional with their monthly spending. And their starting point is always knowing what they are up against i.e. where their money is going.
And you might think you haven’t a hope of finding any more money, but I’d say give it a try and see, you might be surprised.
And if becoming debt free is important to you and is high on your list of priorities this year then as I said, your starting point is to create a monthly budget and know where your money is being spent each month and then look at each category to see where you can find that extra money that can be re-directed and used to accelerate the repayment of debt.
And finally I would recommend the Momentum Strategy above all other methods, because I believe it’s the fastest and best way of staying committed to getting out of debt for good.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie