top ten tips for paying off debt

Top 10 Tips For Paying Off Debt: Smallest Debt First

In Top 10 Tips For Getting Out Of Debt Series by Phil McGilvrayLeave a Comment


Video Transcription

Hi guys, Phil McGilvray here from Grandma’s Jars. Thank you for joining us. Today we are continuing on with our ten part series – our ten tutorial series – Top Ten Tips to Paying Off Debt. Today, we are really getting stuck in the nitty-gritty. This is the sixth session – the sixth tutorial and we are looking at the actual strategy in developing our debt repayment plan.

I have called this particular tutorial the smallest debt first. But what I am going to give you is a real overview of the whole debt repayment process. What I have got is an example from a client I was working with just last night so hopefully that will make it a lot easier for you to understand.   

Understanding Your Debts

What we’re going to do as a first point of call is throw it all out there. How much debt do you have? what are your debts? So we have listed them all down here. Now, with this process it’s really important that we know everything, that we’ve got all the debts. Sometimes we are a bit fearful of what we are going to see. We sort of ignore it and we put it off because we are a bit scared about it.

It’s like when I ask people to set up a budget. They have got to go and get a comprehensive understanding of all of their expenses. People are scared to do that because they don’t know what they are going to see and they are fearful about it. But once they have actually got through that process and have put it all down on paper, sometimes it’s a huge relief because at least once we know what our expenses are or in this case what our debts are. At least we can now do something about it. It’s not just what you owe the bank. If you owe money to Grandma or friends – something like that – make sure you put it all down there. Sometimes, it’s those loans to friends and relatives that bug us the most and therefore we need to deal with it.

Example of Debts

In this case, we got ourselves down here 6 loans starting with a speeding fine of $294, down to the home loan which is a very reasonable $243.000 by today’s standards. So we have:

  1. Listed all the debts
  2. Listed the balance owing on each debt
  3. Listed the current repayments on each debt

Now, the current repayments is what the client is currently paying, so what he’s choosing to pay. The next column is actually the minimum so this is what the institutions actually require of him but what he is choosing to do is pay more. You can see on the VISA card and the Mastercard he is choosing to pay a little more than he needs to –  same with the personal loan and the home loan. And thats good, thats $483 there, the difference between those two. And obviously when we are trying to pay off debt, we do try and pay more than the absolute minimum. However, I suggest that this doesn’t really work.

The Scattergun Approach

Taking this scattergun approach can be a really demoralizing way to try and pay off your debt. A little bit here a little bit there. You never actually see any real significant change in any of the debts and people very quickly become a bit demoralized by the whole process.

Pay The Smallest Debt First

So what I am going to suggest we do is something completely different. Now, what we have got the client to do is list all these debts from smallest to largest. We are going to tackle the smallest debt first. The smallest debt in this instance is $294. Now most people would say, “Why wouldn’t you tackle the biggest debt or the ones with the highest interest rates first?” Mathematically they are absolutely correct. The problem is when it comes to paying of debt, mathematical doesn’t seem to count for much. What really matters is behaviour and a sense of self-belief and confidence in the system that you are using. And most people when they don’t see the progress, it’s very easy to slip back into old habits and just to go, “It’s all too hard.” So what we want to try to do and what we have been successfully doing for the last fifteen years is to help people get little wins on the board really quickly so our self confidence sort of rises, we believe we can actually do it.


So in this instance, we are going to tackle this $249 first. Then what we are going to do, is we are going to pay the absolute minimum on all of our other debts, which in a sense frees up $483. This $483 dollars plus the $60 minimum we are going to throw at this speeding ticket. Now, obviously you can see that the speeding ticket is just $294 so we will have that knocked off in month one. What we also have is $250 that we can use to pay off the Mastercard here. So in month one, the speeding ticket is gone and the Mastercard has been reduced by $250.

Now, the really good thing about that is that you can see that the $60 we were using to pay off the speeding fine can now be channeled towards paying off the second debt. The second debt therefore will also be gone in another two months. So inside three months we will have knocked off the speeding ticket and we will have knocked off the Mastercard.

Having Debts Gone Instead of Reduced

That sort of progress really gets people excited because they can see it actually happening. There is a big difference between having a debt completely gone and having a debt slightly reduced, which is what the scattergun approach does. We sat down with this client and built a month by month repayment plan that actually showed him just how quickly each of these debts would come down, because even as we are focusing on these smaller debts up here, they’re still built into the personal loan and the car loan, a component of principal that is being paid down each month. So even before we get to those, those debts are getting slightly smaller.

Seeing The Finish Line


And we figured that we would actually be able to get rid of all of these five loans within 18 months for this client with a bit of focus. That got him really excited especially when we had it on paper and he could see month by month the progress and he could tick it off as he went along. And having it on paper in front of you is a hugely powerful process because when you can see the finish line, when you can see how it’s all going not happen, all of the sudden the impossible seems possible and we can achieve much greater things than we ever thought.


The Additional Surplus – Paying off Mortgage in 15 Years Instead of 30 year

Now this client was amazed that he could get rid of all this debt in eighteen months because he had been struggling with it for the last couple of years and he’d really made no progress. When we showed him just how quickly this could all be paid off, he was excited about that but what he was really excited about, was in eighteen months we have all of this gone. He will also have about $1,200 in surplus a month because he is no longer paying the repayments on these debts, that he can throw at his home loan. And when we did the sums on paying off his home loan here, we realized that he would be able to pay it off inside fifteen years instead of thirty years and he would save himself something like $168,000 in interest in the process – which is huge. Who wouldn’t want the $168,000 instead of the bank?              

Wrap Up

So that’s the process. It’s really simple and we have these worksheets on our website. If you want to download them please feel free. And as always, if you have got any questions please don’t hesitate to post your question below or contact us via our contacts page.  

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