Concept
Debt payoff plan
A debt payoff plan is Sethi's four-step procedure for consumer debt: list every balance with its rate and minimum, negotiate the rate or move the balance to a cheaper product, choose an order, avalanche by rate or snowball by size, and automate the minimums plus one fixed extra payment on the target.
Most people carrying debt have never listed it, and the total is a shock, which is the point: a number can be attacked and a fog cannot. The list comes first, every card, overdraft, instalment and loan from a relative, each with balance, rate and minimum. Then a phone call: lenders lower rates more often than people expect, and a balance moved to a cheaper product is the same debt at a lower price. Then the order. The avalanche pays the highest rate first and is mathematically best; the snowball pays the smallest balance first and is psychologically best, because closing an account in the first month keeps people going. Either beats no plan. Finally automation: minimums by direct debit on every debt, and one fixed extra payment on the target debt on payday. When the target clears, the whole payment rolls to the next. Throughout, the card pays in full and stays in a drawer, because a plan that adds new debt is a treadmill. The month the last balance is zero, the payment becomes an investment order.
A real-life example
Burak, a sales rep in Gaziantep, has three cards, a phone instalment and an overdraft and pays the minimum on all of them without knowing the total. Listed, it is 84,000 lira. He moves the worst balance to a cheaper consumer loan, chooses the snowball, closes the phone instalment in month one and sets 3,500 extra on the smallest card. Eleven months later two cards are gone and the payment on the last one is larger than any saving he has managed before.
How to use it
- 1List every debt tonight with balance, rate and minimum, and total it.
- 2Call each lender and ask for a lower rate or a cheaper product; the worst answer is no.
- 3Automate minimums plus one fixed extra on the target; when it clears, roll the whole payment forward.