The Debt Diet Challenge Week #6: Debt Reduction by Snowball ... or Avalanche?

The Debt Diet is an online behavioral change program to help users get out of debt by putting aside $10 a day. It was developed by Pro-Change Behavior Systems and Jean Chatzky, author of the best-selling Pay It Down and a coach on The Debt Diet series on the Oprah show.

Jean Chatzky read the applications solicited by Credit.com and chose 5 participants. She got them started on The Debt Diet and is now speaking to them once a week, answering their questions and helping them to get off to a good start. For their part, our participants are doing The Debt Diet exercises, which include tracking their spending, negotiating monthly bills (using The Debt Diet scripts) and trying to modify their heavy-spending ways. You can find The Debt Diet ($49.95) at jeanchatzky.com. The participants also blog regularly on Credit.com about their experiences with The Debt Diet.

A few years back, with the help of the folks at Roper and Money magazine, I conducted a large-scale study on money and happiness for a book I was writing. The study—which noted that money makes us more miserable than any other factor in our lives—unleashed 10 things you can do to improve your happiness in this area. Among them: Pay your bills as they come in rather than waiting to pay them all once or twice a month. Save at least 5 percent of whatever you’re bringing in (I know for financial reasons you’ll want to save more than that, but for happiness purposes, 5 percent is the trigger.) And set manageable goals.

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I was thinking of the latter as I spoke with Debt Dieters Melissa and Erin recently. When you are attempting a lofty challenge—and all of our debt dieters, some of whom started with four figures of debt, some with five figures—you often get a charge right out of the gate. As you’ve been making so little progress for so long, the first few hundred you amass to throw against your formerly stagnant debt, like the first few pounds that roll off the scale feel like a triumph. But unless progress speeds up—and with debt reduction just like weight loss, it rarely does—eventually you take another look at your goal and realize that it still looks really large.

This is the reason that many debt reducers turn to the snowball method of debt reduction (which instructs you to focus on the smallest balances first) rather than the avalanche (which has you focus on the highest interest rate debts first). The avalanche saves you money. But the snowball has the psychological advantage of allowing you to cross things off your list.

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Spending more than you must to get out of debt doesn’t make sense to me, so I prefer and advocate the avalanche. But clearly both Melissa and Erin were feeling the need to do some crossing off of their own. For them—and any of you in the same situation—I recommend benchmarks. Break your goals down into mini-goals or benchmarks so that you have something you actually can cross off on a weekly or monthly basis. The benchmarks should be large enough that you feel you’re accomplishing something, but not so large that they incite pressure or feel insurmountable.

An example: I ran a five-mile race last weekend. It wasn’t the longest distance I’d run, but it was my first race in a while and I was apprehensive at the start. The thought of a 45-50 minute run at a speed higher than my regular jog was daunting. So I stopped thinking about the entire distance and started thinking about just the next mile. As each one ticked by I felt a little juiced. And at the three-mile mark, when I could comfortably say I was more than halfway there, I relaxed through to the end. Benchmarks—like goals—make for a happier financial life.

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