First Steps to Saving Money – Tackling Your Debt (Part 1)

Jack Ohayon CFA, April 14, 2017, 4:44 p.m.

First Steps to Saving Money – Tackling Your Debt (Part 1)

Just as debt seems to snowball the same methods needs to be applied to get rid of it.

Consider a scenario where you have 10 separate loans with different interest rates that you need to pay off.

Which one do you start paying off?

Logically, it would be the one with the highest interest rate first.

However, studies have demonstrated that paying off the loan with the smallest balance enables you to snowball and gain momentum as each balance is paid off. As each loan is getting paid off, the borrower experiences a feeling of accomplishment and achievement. This behavior modification enables you to gain traction and motivation to face the next tranche.

Once this behavior modification is set, you are set to achieve your goals and dreams. Anything is achievable.

What about if you had the financial means to pay off all loans at once? (e.g. you inherited money) Would you still use the snowball method?

It depends on what you value most. Every person has different preferences.

  1. Do you want to erase the debt immediately? You will not have an achievement feeling but bottom line the debt is gone and you save on interest payments
  2. Or do you want gain traction enabling you to achieve multiple wins with long term effects?

Comparatively, paying off a loan at once is like quitting smoking cold turkey. The probability of relapse is higher than gradually quitting with a structured plan.

A not so known fact is gradually paying off debts actually increases your credit score. The reason is, it shows the lender that you are consistent. Paying off loans off in one shot is erratic making it challenging to predict the borrowers behavior which can adversely affect credit scores.

The key to tackling debt or other challenges is to gradually build your way forward.

Build a budget for your lifestyle

Fact: On average, people spend more time planning vacations than planning their finances.

Let’s keep it that way.

Step 1. Download Mint or You Need A Budget (YNAB) app from Google Play store or Apple appstore.

Step 2. Put together a budget using the app by including your monthly take-home pay and your monthly expenses. Itemize your all expenses such as rent, movies, parking, internet, mobile phone. Do not lump multiple items such as car lease, insurance and gas/fuel into one item. A good place to start is to look at your credit card bill to set up the categories. This is a onetime set up. The more granular the better.

Once everything is inputted, the app will calculate income and expenses and as long as you have more money coming in than going out, you can move to step 3.

If you have more going out than coming in, you need to cut back or earn more money e.g. sell on stuff on eBay. It won’t take long until you have a positive cash flow.

Step 3. Save. Yes, it is a four-letter word but so is debt. Once you have a bit extra left over you can take the next step towards financial independence.

Helping you with your journey

Helium Investments specializes in getting you started with investing and moving forward to financial independence. We are an automated investment advisor, offering a wide array of investment strategies depending on your goals and comfort.

You do not need to know much about investing to feel comfortable with us. We boast an intuitive and simple interface which can be customized from detailed notifications to set and forget.

Technology allows us to offer a low fee of 0.40% (that is $40 per $10,000) compared to other advisers that charge 1% (that is $100 per $10,000). Our software has been vigorously vetted, tested and complies to the highest standards.

We also offer automatic rebalancing and tax-loss harvesting to get you back on track and offset taxes on income and gains.

Signing up takes no more than 5 minutes.

5 minutes is all it takes to start towards financial independence. It could be one of the wisest investment decisions of your life.

Part 2

Keep an eye out for Part 2 on how to save money where we will discuss specific investment options.