Mastering Debt Repayment: Lessons from Prison

Debt can often feel like being in a prison, but here's a little lesson from the inside that might help you out: "When you enter prison, take on the largest prisoner to establish dominance."

In this case, the largest prisoner is the debt with the highest interest rate. Once you've dealt with that one, move on to the next largest and so on until you've taken care of all your debt. Remember, interest is how banks make their money off you, so knocking out the high-interest debts first is crucial.

But here is the twist: You can also start with the smallest guy in the prison. This is the smallest debt. By paying off your smallest debt first, you create momentum, just like recruiting the smallest guy to help you fight the next smallest one. 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.

Here's how it works:

Let's say you have three debts:

• Debt A: $100k, $6k monthly payment
• Debt B: $50k, $3k monthly payment
• Debt C: $10k, $500 monthly payment

You start with Debt C, the smallest debt. Once that's paid off, instead of just paying $3k for Debt B, you increase it to $3,500 while maintaining the $6k for Debt A. This accelerates paying off Debt B. Once Debt B is cleared, you direct the $9,500 towards Debt A, clearing it even faster. And there you have it, you're debt-free.

The first method is called the Avalanche Method, and the second one is called the Snowball Method.

So, just because you're in prison (debt), doesn't mean you can't enjoy your stay there. Be on top of your debt, always.

Cheers

Malik Shehu, CFA, MBA

Wealth Advisor | Educator | Financial Literacy Advocate