How To Pay Your Debt (feat. Prison)
Malik Shehu, CFA, MBA
Wealth Advisor | Cool Beard | I write and speak about pensions and financial planning. Passionate about helping individuals create and maintain wealth. Fascinated with behavioral finance; gave a TedX talk on it.
1. There is a saying that, "when you enter prison, take on the largest prisoner to establish dominance". Once you've dealt with him, take on the second-largest prisoner and so on and so forth until you have taken care of all the prisoners to prove you're top dog.
The largest prisoner is the debt with the *biggest interest*. Once you've taken care of him, you move on to tackle the second biggest prisoner (which is the next debt with the second-largest interest). You keep winning until you clear the last debt with the smallest interest.
Banks make their money through interest and clearing off the largest interest-laden debt helps you feel badass. Remember, interest is how they make their money off you.
2. Start with the smallest guy in the prison. This is easy because, well, the fight will be over quickly. When you win, you tell the smallest guy that you need his help to fight the next smallest guy. That is now two on one. When you beat the next smallest guy, the same thing, you ask him to join your rank. The three of you go for the next and then the four of you the next and so on until you face the biggest prisoner. It'll be easy to face the biggest guy because you have an army at your disposal.
This smallest guy is the *smallest debt*. You pay the smallest debt first. Once you've finished, assume you are still paying it and use that money to take care of the next smallest.
Eg. If you have 3 debts whose monthly payments are as follows:
Debt A is worth 100k, and you pay 6k a month.
Debt B is worth 50k and you pay 3k a month.
Debt C is worth 10k and you pay 500 monthly.
You will start with Debt C . Once you are done with Debt C, instead of just paying the 3k for Debt B, you will pay 3500 instead, while still maintaining the 6k for Debt A. This will finish Debt B faster. When you are done, you will pay 9500 for debt A. This finishes Debt A quicker. And voila, you are debt-free.
The first method of debt payment is called the Avalanche Method and the second method is called the Snowball Method.
Just because you are in prison doesn't mean you can't enjoy your stay there. Be on top of your debt, always.