So, you have spent more than you earned and now you’re finding yourself buried under a mountain of debt. That’s okay! We’ve all made mistakes. No judgment! Having a lot of debt is the problem. Now let’s talk about the solution.
The thing about getting out of financially challenging situations is that you hear all kinds of advice. So much so, that after a point you begin to lose the sense of what’s right and what’s not. You rely on professional help. You listen to what experts have to say. You suddenly decide to become a mathematician crunching numbers and calculating interest rates trying to make your way out of it.
But, Dave Ramsey – the famous American businessperson and motivational speaker who helped countless people come out of debt successfully says that – you don’t have to be a math expert or a financial guru to have a plan to get out of debt.
According to him, people should pay off their debts from smallest to largest. It’s not really so much about mathematics, as it’s about building the momentum.
Let’s understand what he actually means by that, shall we?
The human psychology
According to Dave, the ability to pay off debt successfully has many psychological implications. One of these implications is experiencing those ‘yes, I was able to do it’ moments.
You enjoy that moment when you are able to successfully check an item off the list. For example, say you owe money to ten people and make a list of it. Accordingly to this rule, you begin by paying off the person you owe the least amount of money.
Just the act of knowing that you have one less person to deal with is enough to make you feel as if a huge baggage has been lifted off your shoulder.
The benefit of building momentum slowly
If you start off by the biggest item on your list, there’s a high likelihood that soon you will start feeling discouraged and may give-up midway. We human want instant results. And not being able to pay off a huge loan for long could easily make you frustrated. Before you know, you succumb to debt fatigue.
But, when you start by the easiest item on the list, you start building the momentum slowly but surely. The step by step success makes you feel more confident that you are headed the right direction, and that what you’re trying to achieve is not impossible. You feel confident that will get there!
Activates their mind’s reward mechanism
What Dave meant when he said that it’s not about math, but about momentum – was that the art of paying off debt is less about the math being in favor of helping you pay off the highest interest rates first. People just want to feel like they have been able to pay off a loan and have only few more to go. For them, the psychological implications associated with list getting shorter and shorter activates their mind’s reward mechanism by releasing dopamine.
Starting off with the smallest loans and gradually moving towards bigger items reduces the likelihood of debt fatigue happening.
So, that should pretty much explains how you can exploit human psychology in the favor of bidding your loans goodbye.