Updated on 10.21.08

That First Taste of Financial Success

Trent Hamm

wendy3About a month after I hit bottom in terms of my debt, I sent in a large payment on one of my credit cards, a big enough payment to completely eliminate the balance. That money had come from a lot of things: eating very cheaply for a while, selling off a bunch of DVDs and video games, and a little bit of freelance work.

I still remember how I felt when I put that envelope in the mailbox. I felt a bit queasy in my stomach, knowing how big that check was, but I also felt very, very excited. A debt was gone. Gone! And I had done it myself, through my own efforts.

What was most surprising is that the first little taste of success didn’t encourage me to go out and buy something to celebrate. What it actually did was make me want more of that success. I burned with an even stronger desire to pay off the rest of my credit cards, to pay off our car loans, to pay off my remaining student loans, and so on.

That first little taste of success made me want to eat the whole enchilada. And it’s been tasty all the way along.

A lot of people like to criticize Dave Ramsey and his “Total Money Makeover” because he recommends paying off the debt with the lowest balance first instead of paying off the debt with the highest interest rate first. In terms of pure math, Ramsey’s method is not optimal – the mathematically optimal way is to always go for the highest interest rate first, then work downwards.

Sometimes, though, it’s valuable to look beyond numbers. When I go back to my first taste of financial success, I’m reminded of how powerful I felt when I slipped that envelope in the mailbox. I felt, for the first time, like I could actually do this. My recovery from debt went from seeming like an almost-mythical goal to something I could actually do. And I wanted it. Bad.

That success provided the fuel that I needed to keep going, to keep pushing, and to eventually start sharing my experiences here on The Simple Dollar.

And that first debt I paid off? It wasn’t the mathematically optimal one. Instead, it was the one with the lowest balance (which wasn’t really all that low to begin with). I chose that debt because it was the one I knew I could reach and I was desperate to feel some kind of success. That taste of success was the fuel for the rest of it.

What if I had adamantly subscribed to the best move in terms of math? I honestly am not sure. I’d like to believe that the pain I felt holding my son and wondering about our future would have been enough to push me through, but I also remember how difficult that first month was: sitting down and really looking at our financial state, selling off a lot of collections I had spent years building up, having some hard conversations with my wife, trying to break some difficult spending habits.

When I put that envelope in that mailbox, I really needed a big boost of motivation, and the idea that I really had eliminated one of those debts made a huge difference. Would a big partial payment had the same impact? It might have had some impact, but I don’t believe it would have provided the fuel I needed to keep going. My best hope is that it would have kept pushing me enough to get rid of that big debt and that would have pushed me onward, but I don’t know if that would have happened.

So, what do I suggest for all of you who are out there trying to figure out how to turn things around? Pick one target – one that you can only reach if you push yourself almost to the limit. It might be your biggest debt, or it might be a smaller one. But focus on that goal – and knock it down. The feeling you get from victory is tremendous, and it might just fuel you on to turning everything around.

Don’t overlook the value of a strong motivator. It can make all the difference between success and failure.

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  1. Dave says:

    Kind of a side note, but what the heck is that picture of?

  2. Trent,
    I have to agree with you on the need to focus on one goal. Far too often we jump from o ne project/goal to another without completing the first one.

    While we might have the best of intentions, this lack of focus usually leads to a plethora of unfinished goals.

    I’ve been guilty of this several times in my life and I have identified it as one of my (many) weaknesses.

  3. Stacey says:

    We’ve been very lucky in that we have no credit card debt, but we faced the same questions that you had.

    Our goal was to become debt free – but what to tackle first, the mortgage or the student loans? While the mortgage was a lower interest rate, it was MUCH larger than our student loans. It just didn’t make sense to pay the minimums on an $8,000 student loan while tackling a $130,000 mortgage! Yes, yes, tax deductions… but we were paying $80 a month and $70 was interest. Not worth it IMO.

    It feels oh-so-good to be student loan-free just 15 months after graduation! That first taste of debt freedom really opened our eyes to the value of frugality and paying off debt.

  4. gnorten says:

    I completely understand. I’ve become a big subscriber to Dave Ramsey’s belief that personal finances are 90% personal, rather than financial.

    Those, not so little in my opinion, successes in paying off debt are tremendous motivators. If we were motivated simply by which plan was mathmatically correct, we wouldn’t be in this situation to begin with.

    I’m one month away from reaching my first goal, paying off the credit card. It’ll be the first time in 16 years that I won’t have credit card debt. Even though I’m a month away, I can already TASTE how good it’s going to feel.

  5. troy says:

    I get a kick out of those who look at the DR method and continue to point out it’s sub-optimal mathematical approach.

    They then go on to espouse the highest interest approach as the only correct way.

    I think there are many different ways to approach it. I think you pay off the “riskiest” loans first. Not highest interest, but highest priority.

    Sometimes it is highest interest. Sometimes it is highest monthly payment. Sometimes it is a loan to a family member. Or sometimes it is debt to the IRS.

    Sometimes the highest interest isn’t the highest after a tax deduction.

    And as you said, most of the time it should start with a small debt you can handle, so you can taste success. There is no substitute for paying off a debt completely. Watching your balance go down is one thing. Having it gone entirely is completely different.

    Your story is both refreshing and motivating.

  6. Megan says:

    We paid off our truck last month. It was our most expensive bill with the highest interest. But we paid it off first because we really wanted to be able to say we own the truck! And with a gift from my grandma, we were able to! It is wonderful saying we own the truck, and are so much closer to being debt free. My husband is super excited to get rid of debt. He used some of his business savings to pay off the credit card too, so that’s one less credit card bill. Leaving, one credit card bill and student loans. We are not worried about the loans as much, and should focus on paying off mine before they get interest, but we are excited to tackle that credit card. Thanks for the inspiration!

  7. Excellent post, Trent. Your candid use of personal experiences really highlight the message you provide us on this blog. I like that you support different paths to the same goal. You are firm in your premises of “Spending less than you earn” and “Pay off debt as quickly as possible”, but you are not controlling in how you want people to do it. You provide insightful observations and illustrative stories, but let readers make their own choices.

  8. As a life coach, I’m all about the “celebration”! I believe it’s an incredible motivator, as well as a great way to build confidence and become optimistic in your goals. I love the fact that you paid off your lowest debt to get a taste of success, but what if you paired that with a “prize” that made it that much sweeter?

    When most people think of celebrating, though, they think of expensive dinners and big trips. It’s really worthwhile to put a list together of all of those no/low cost things in life that make a day a celebration. My list includes a bubble bath, reading the Sunday Times on my roof deck, dark chocolate, and a Bridezillas mini-marathon.

  9. Aya @ thrive says:

    I think so many of us know that the best way to go is to focus on one goal at a time, but when we’re overwhelmed even picking that goal is a difficult task. I admire your success and I think your posting can be a motivation for many! It’s one thing to receive advice but it’s another to hear advice from someone who has experienced what you’re going through and gotten through it in one piece :)

  10. BM says:

    Your post made me relive some of my experiences couple of years ago, when I paid off all my debts other than mortgage in about 15 months. Just like you, the trigger for change was the concern for my son who was about an year old then.

  11. GEoff says:

    @Dave – after staring at the picture for awhile I think it’s a change jar, just like Dad used to empty his change into every night.

  12. SteveJ says:

    Great post!

    It’s kind of sad to look back at it this way, but I remember paying off the new car I bought right after graduation. Probably one of the top 10 thrills of my life. I think maybe it’s because for so many of the other accomplishments, there was a lot of help and support from others (graduating, getting married, winning the championship, etc), while conquering debt is a deeply personal thing. Also for many other noteworthy goals the skids are greased for your success, it’s in no one’s best interest for your wedding to be a cataclysmic failure. With debt it really seems like the banks are against you, society is against you (they want you to buy that shiny new car/house/boat in the first place right?), and of course your own habits aren’t helping much either.

    “He who gains a victory over other men is strong; but he who gains a victory over himself is all powerful” Lao-Tzu

  13. Frugal Dad says:

    I remember that feeling of paying off the first debt, and I still get just as excited when I retire another one in the debt snowball plan. The key to our success was getting just as excited about paying things off as we used to be accumulating them!

  14. Sal says:

    My wife and I are working on some of the medical debt from our son. It feels good every paycheck to cross 2 or 3 more debts off the list. Each little victory gives us that much more drive to get the whole thing taken care of. Dave Ramsey, while not having the mathematical advantage, has the force of enthusiasm on his side, which, in my view is much more important to becoming debt free.

  15. Kevin says:

    I had a similar experience as you when I paid off my credit card. I became so excited that all the payments I made there could now go to my car loan (which I paid off 13 months early). After that, everything went to savings. To watch that build up has been very gratifying. I completely agree that sometimes an emotional victory is just, or more, important as a financial one.

  16. Yes, setting that first goal . . .and actually making it was the best feeling! Now, I can tackle each new financial goal with confidence. It’s so true that success breeds success.

  17. Ryan McLean says:

    Thats awesome! I know the feeling of being debt free. It’s great and you feel so free.

  18. Zendiagrams says:

    Motivation to keep going is a good factor for paying off some of the smaller debts.

    But depending on ones situation, clearing out many smaller debts can lead to better credit to allow for a loan that could pay off a larger high interest debt and make it more feasible to pay down faster.

  19. It’s all about taking that first step. Paying off that first debt gives you back some control and once you feel like you’re in control of your finances, you can move forward and really make progress.

    @SteveJ, I love that Lao-Tzu quote. It’s so true!

  20. elperko says:

    Yes… it’s amazing how debt sneaks up on you. I’ve had the monkey around my neck for 5 years, and in the last 2 months, I have finally been snowballing my way out of debt, focusing on the debt with the highest monthly payments (not highest interest rates) first, so that my monthly cashflow could increase, and I could then roll that into knocking down the next one. Previously I had been overpaying slightly on all of my debt, which was dumb, and a scattershot approach. Since heeding the advice of Dirk, I have knocked off 3 student loans, 4 credit cards, and a loan against my 401k. I have 2 more credit cards to go, which I can’t wait to kill… The snowballing technique has freed up over $1000/month that I was using to pay minimum payments on these loans. So I can now roll that extra cashflow into the next loan and pay down the balance more quickly, and after the next two credit cards are gone, I can actually start saving again. Seems to me that the only reason you’d worry about paying down the higher interest rate loans first is if you plan to keep the loans for a long time. Otherwise, it seems like the name of the game is to free up monthly cashflow, and you don’t worry as much about the interest rates. I’d be curious to see if anyone has run the numbers?

  21. eaufraiche says:

    uhhhhh… hit pause after 2 paragraphs. did it all by yourself, Trent?

    what about that wonderful wife of yours? let’s give the girl a little credit sometimes!


  22. Georgia says:

    I wasn’t as lucky as some. Around age 50 I lost my job and had to search for 1 year to get another. Our cc bills rose. Then we helped our daughter who was working two full time jobs and still unable to make ends meet. Our cc bills turned out to be astronomical for us. But I had learned one valuable lesson while working for an S&L. Always pay your bills on time. When new credit offers came in, I always got the best offers. When experts said you were ahead of the game if your interest rate was 14%, all my credit was at 9.9% until paid off. Later, I found an offer for 4.9% until paid off. Finally, the last 3 years it was 0% for 1 year (3 different cards.)

    It took us 15 years, but the month after I retired I took my first 457 payment out and paid our last bill – we had bought a used car 6 months before. By that time I had been using my cc to pay for almost everything and paying it off each month. We were 69 & 70, but the rush was still there.

    I have refused to have any debt since then. Keep up the good work, Trent, at telling people the good news. On one of your posts someone suggested using your stuff in local high schools and colleges. I think that is a marvelous idea. They learn math, but not money management. Charles Givens, “Wealth Without Risk” had this same idea several years ago. We can’t expect frugal citizens if they can’t learn it at home or at school.

  23. Good post, and good picture.

  24. Liberty says:

    Amazing timing for me to have read this article, Trent. I just paid off my first credit card a day ago. Same deal – chose the smallest balance over higher ones that I still owe plenty on.. I was so excited with I clicked on “submit payment”, knowing that FINALLY the amount owed was gone, gone, gone. The next day thought I felt rather emotionally drained and overwhelmed. That was because I want the other debts to disappear as “easily” as this one, and there’s no way they will, not for a long, long time, you know? Still, it was a positive event in my financial situation and I shall continue to plod along. Love your articles. Just signed up yesterday. ~ Thanks

  25. JimK says:

    By paying off the smallest balance first, the DR method, for me, freed up some cash in case something larger than your emergency fund happened. I needed to free up cash ASAP. I deemed the cash flow problem to be more important than paying less interest at the time.

    Once I had the cash flow problem solved, then I could pick and choose the debt to attack based on interest rate, etc.

  26. Cambo says:

    For me, this is one of the best posts I’ve read.

    I’ve been forgetting to be happy when I tick off a debt, so I’m going to stop and do that for a second, rather than just looking at the next one to tackle.

  27. tightwadfan says:

    I agree about starting with the smallest debt – it doesn’t make the most sense mathematically but it definitely works psychologically.

    The other thing I noticed about paying off debt – before we did, my husband and I were used to having debt payments as part of our monthly bills – you’ve got rent, utilities, car loan, student loan, etc. But once we paid off all your debt and those monthly payments were gone, I found that I never wanted them back as part of my life.

  28. Rob in Madrid says:

    I couldn’t agree more, something changes when you have real cold hard cash in the bank, you don’t want to spend it!!!!!

    Now if I could only apply the same principal to my eating I could lose that growing gut!!!!

  29. Nancy says:

    Great post and I agree with Dave Ramsey paying off those smaller balances first gives that needed boost to continue. I see it that if you eliminate some smaller debts and contuinue to put those funds to the next smaller debt as you pay things off and so on, the extra interest you are paying on higher interest balances is evened out when you can start slugging away at the high balances with more money later. To me the reward of seeing a zero balance out weights the total dollar amount saved. And you are better off then if you had not started a program.

  30. I made my decision to pay off my smallest debt for psychological reasons without ever hearing of Dave Ramsey at the time.

    Praise God I will have the first credit card paid off by the end of this month! I sold my beloved home theater project to do it.

  31. ha'apai says:

    FWIW, it doesn’t have to be about emotion, or psychology, or even victory. There are frequently reasons for paying off a cheap debt instead of paying down a more expensive one that have little to do with emotions. Since I was on of those folks who suspected that emotions (and following the crowd) had a bit do do with getting into debt, I was understandably suspicious of other people’s suggestions that I harness the power of emotions to get out of debt.

    My tax refund was unexpectedly large (who knew that you could qualify for the EITC without dependents?) and I was debating what to do with it before it arrived. My two best choices were paying down the signature loan (10.9% APR, fixed, $104 a month) or paying off the Perkins loan (5% APR, fixed, $40 a month, eligible for the full student loan interest deduction) and applying the remainder to the signature loan.

    With the voices of my tax accounting and finance profs in the background, I dutifully crunched the numbers. First I annualized. 10.9% APR compounded monthly became 11.46%. 5% became 5.14%. Then I applied 1-MTR. 11.46% remained unchanged but 5.14% went down to 4.15%. According to what I had been taught, everything had to go toward the signature loan.

    Then where was this voice saying “Pay off the Perkins loan” coming from? Had months of financial stress and rubbing shoulders with near-innumerate, short-term thinkers really affected me that much? Why was I even considering paying off debt that cheap just to free up $40 a month? I went to bed profoundly confused and upset with myself. My brain was apparently rotting.

    By the time the refunds hit my account, I had an answer. My finance prof, and just about every other credentialed money-talker out there, suffered from a going concern bias. Their analysis ignored transaction costs, opportunity costs, and the possibility of default. Unfortunately, it was no longer clear whether I was a going concern. At that time, I had $50 to $100 a month in discretionary income after paying the absolute minimum on my debts, absolutely no savings, and unbudgeted irregular expenses were running about $50 a month. I was paying down debt at a nice clip but I was also perpetually short of cash and it would not have taken much of a bump on the road to send me into the ditch.

    In other words, I had become aware of two highly impolite truths. Being broke is damned expensive and defaulting on your debt obligations is ungodly expensive.

    Let’s elaborate on how being broke is expensive. Being broke can mean that your bank charges you a $2 bank service charge each month because your checking balance is under $500. Being broke can mean that when the cheapest margarine that you can bear to eat goes on sale for half price, you can only pick up an extra month’s supply. Being broke can mean paying $4 more for a parking ticket simply because you do not have the cash to pay off the ticket within an eight hour window. Being broke can mean that you can only afford to pay your automobile insurance quarterly instead of monthly and the insurance company charges you an extra $3.50 each time they send you a paper bill. Being broke can mean buying coasting into work on Thursday morning on fumes and buying gasoline at weekend prices just to get home that night. A lot of this nickle and dime stuff can be avoided with a little jingle or a little planning, but until you get the hang of planning or have the cash in your pocket, being broke will cost you a whole lot more than the interest rate on your highest debt.

    It’s hardly necessary to elaborate on how expensive it is to default on one’s financial obligations. Bouncing a check or being late on a single financial obligation can trigger all sorts of penalties and interest rate increases. The less discretionary income you have, the more likely you are to incur these penalties and these penalties can make the interest that you are currently paying seem absolutely insignificant.

    I made a spreadsheet to calculate how much paying off the Perkins loan would cost me. I quickly decided that paying an extra $15 in interest and taxes over the next ten months would dramatically improve my cash flow and dramatically decrease my risk of default.

    I’ve never regretted paying off the Perkins loan ahead of the signature loan. With that payment gone, I no longer had to plan my finances three paychecks in advance just to stay afloat. My concerns that I would take the $40 a month and coast instead of applying it to the signature loan were similarly misplaced. It was incredibly easy to put that money toward the signature loan.

    Paying off the small cheap loan first was probably one of the best moves that I have ever made.

  32. Jim says:

    By paying off the smallest balance first, the DR method, for me, freed up some cash in case something larger than your emergency fund happened. I needed to free up cash ASAP. I deemed the cash flow problem to be more important than paying less interest at the time.

    Once I had the cash flow problem solved, then I could pick and choose the debt to attack based on interest rate, etc.

  33. I just wrote an article called The Satisfaction of Paying off Debt and you know what, that’s the biggest motivator there is.

    Of course, once that has happened, saving for the future is the next one :-)

  34. Kris says:

    Great post Trent.

    I am a fan of Dave Ramsey’s and I like to use his methodology often as guidance. I have been following the “pay the smallest balance first” approach only because it keeps me motivated. If I went to tackle the highest interest first, I probably would have given up before paying off the first Card as it was the highest balance credit card I had at the time.

  35. My question for those who criticize the Ramsey method is how much debt they’ve paid off. Too often, people get hung up on that and then just stay in debt.

    The important thing is to have a system. If you pay your debts in the perfect, optimal order (interest rate high to low), you’ll have your debts paid off approximately one month sooner than if you paid them off in the worst possible order (interest rates low to high). One month! So even if you’re wrong, you win big time.

  36. Nick says:

    Being debt free is great (or at least consumer debt free). Besides from the mental well-being you get from it, I find I’m less likely to actual spend money when it’s cash from my bank account, rather than some credit card whose statement I see once a month.

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