In this step, The Barefoot Investor says you need to tackle your debts. Make sure you write them down and include the interest rates next to each one. To help you pay off your debts easier, figure out if you can negotiate better rates with the current lender or move to another one who will offer you cuts.
List your debts in order from smallest to biggest, and then start by paying off the smallest debt. This will give you the feeling like you’re making great progress and will build momentum in reaching and paying off those bigger debts.
To do this, Pape recommends organising your debt into five domino blocks that will then be knocked down as you complete each step. Here’s a quick breakdown of each domino:
Domino 1 (Calculate)
Before you initiate your plan of attack to crush your debt, you need to know what you’re working with – and that’s exactly what this first step involves.
Calculate all the current debts you have by writing them down or creating a spreadsheet on your laptop (as accountants, we love spreadsheets). This can include credit cards, outstanding fines or loan repayments such as for your car or electronics – basically, any amount of money you owe.
Domino 2 (Negotiate)
Once you have your first domino lined up, it’s time for the next one: negotiating your larger debt repayments.
With your statements in one hand and your phone in the other, the Barefoot Investor recommends calling your bank and trying to negotiate a lower rate on your credit card repayments and loans – hard. If your bank won’t play ball or puts up stiff resistance, which they most likely will, Pape says to let them know you’ve been offered a better deal at another bank.
You can tell them that another bank has offered you a deal such as no application, transfer or ongoing fees with a 0% balance transfer for the first 18 months. Even though your bank most likely won’t be able to match it, the chances are high that they will instead counter the offer by offering to lower the rate on your current deal.
Keeping customers is always cheaper than acquiring new ones, and banks are fully aware of this.
Domino 3 (Eliminate)
This step is all about eliminating temptation. Grab a pair of scissors and start cutting up all of your credit cards. This physical act is a symbol of freeing yourself from debt and moving forward into a debt-free future.
Domino 4 (Detonate)
This next step involves arranging your debt list in order of smallest to largest, and focusing your attention on tackling the smaller debts. By knocking off your smaller debts, you will get a huge boost of morale and confidence.
Start with your smallest debt first, which could be something as tiny as owing $5 to your mate who shouted you a coffee at work. By tackling the smallest debt first and then working your way up your list, you will gain momentum towards attacking the larger debts.
While this will make paying off your other debts more manageable, it’s crucial to remember that you must always pay the minimum monthly repayments on all your existing debts. Receiving letters and phone calls from determined debt collectors isn’t going to make your journey towards becoming debt-free any easier.
Domino 5 (Celebrate)
This last step is pretty self-explanatory: celebrate!
Once your smallest debt is paid, such as a loan repayment, it’s very therapeutic to celebrate. This can involve grabbing your final repayment bill and setting it on fire in the sink – or just simply throwing it in the bin.
Every win needs to be celebrated, no matter how small. This is essential to keeping the momentum going and keeping you focused and on track to eliminating all your debts. But remember to strike while the iron is hot!
Keep going and focus your attention on tackling the next debt, lining up the dominos and then knocking them down. With each domino you knock down, you will gain back control over your situation.
