How Financial Planners Ought To Help To Pay Off Debt (it makes you cringe, but it works)

Can I be painfully honest with you for a moment?

Not thank-God-he-told-me honesty, where somebody points out you have spinach on your teeth.

No, I’m talking about the sucker-punch-straight-to-the-face brand of honesty.

It’s brutal. It’s ugly. It’s unexpected.

In fact, I’ve been holding off telling you this. So, out of respect for you, I want to tell you the truth.

And I can almost guarantee you will NOT enjoy it.

So here it is.

You know how you’ve been helping your clients with their debt-issues? Tried everything, and it’s just not working, right?

Well, it’s not because you haven’t found the right debt repayment structure. It’s not because of some easy budgeting tricks. It’s not because of the way you’re dealing with debt collectors.

It’s because you’re giving the wrong advice.

Did I just say you’re giving the wrong advice?

Yes, I did. Sorry.

Now, to be clear, this is not a ruse where “giving the wrong advice” turns out to be a clever acronym for something far less offensive. The truth is, I’m calling you out, and I’m doing it out of love.

Because you see, your analytical brain is lying to you.

It tells you to tell your clients to pay off their 20 – 30 percent credit card debt first. Because this interest rate is clearly the highest of them all.

Seems like the logical, rational thing to do right? To pay down high-interest debt first to optimize the impact of their money.


There’s one really big thing you’re missing. Here it is:

You Forgot About The Debt Snowball

One of the most respected, and popular personal finance guru’s out there is Dave Ramsey.

In his books and on his radio show, Ramsey provides financial advice to individuals and families who are struggling, and most often, their number-one problem is too much debt.

One of Ramsey’s best-known and most controversial debt-fighting techniques is the “Debt Snowball.”


Yes, because I’m sure Ramsey’s advice will make you cringe.

Via Switch – How to Change Things When Change is Hard:

Here’s what the “Debt Snowball” is about:

  1. List all of your debts
  2. Arrange them in order from smallest to largest
  3. Make only the minimum payments on every debt, with one exception:
  4. After the minimum payments are made, every available dollar should be put forward the first and smallest debt on the list

The smallest debt?


Because the smallest debt can be paid off relatively quickly, so that your client can cross it off their list and then direct every available dollar to pay off the second debt, then the third, then the fourth.

As they cross off each debt, they can eliminate a minimum payment, which gives your client more cash to attack the next debt.

That’s why the strategy is called a “Debt Snowball”.

Which each debt that is conquered, the “snowball” of money applied to the next debt grows and rolls a little faster.

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Now, do you happen to notice what’s missing here?

It’s the mention of interest rates.

If your clients’ smallest debt was a past-due utility bill, with no interest charge whatsoever, Ramsey still advises to pay it off before tackling a credit card bill, which might have interest rates of 20 percent or above.

I told you so.

This advice makes you cringe, right?


Because your number-crunching capabilities are NOT the solution to your client’s problem

Ramsey states that people get themselves into financial trouble because they lose control. They begin to feel powerless in the face of a mountain of debt.

The problem?

You can’t combat powerlessness with math.       

You combat it by proving to people that they can win.

If you pay $185 toward a $20,000 debt on a high-interest credit card, you’re still going to feel hopeless. But if you completely pay off a $185 overdue utility bill, you can cross it off your list.

You’ve won a victory over debt.

But hey.

You’re smarter than that, aren’t you?

You’re still not convinced, right?

So let’s see what science has to say about this.

The Smallest Change Has the Biggest Impact

Behavioral scientists Scott Wiltermuth and Francesca Gino believed that people’s motivation to achieve a reward could be affected by the “category” in which the reward was placed.

Via The Small Big – Small Changes That Spark Big Influence:

“In one of their studies, participants were asked to complete a simple ten-minute writing task in exchange for a reward. The possible rewards consisted of a mix of inexpensive items displayed in two large plastic containers from which participants could choose one reward. But all participants were told that if they (voluntarily) chose to complete a second 10-minute task – therefore working a total of 20 minutes – they could choose a second item from the available rewards.

Unbeknownst to the participants, they had been randomly assigned to one of two groups, and there was one important difference in the information given to the two groups. The first group was told that if they completed the additional writing task, they could take their second award from any of the containers.

In contrast, the second group was told that if they completed the additional task, the two rewards they selected would have to come from different containers, because the containers held “two categories of rewards.”

Remarkably, despite the fact that all the participants saw that the two containers contained the same mix of items those in the second group were three times more motivated to complete the additional task than those in the first group.

Perhaps even more surprising was the fact that the enjoyment of the writing tasks was significantly higher among the participants who were told they would be choosing from two categories rather than one.


According to Wiltermuth and Gino, dividing the rewards into categories (even meaningless ones) made people feel that they would be “losing out” on something if they didn’t complete the additional task.

Thus, when seeking to influence people to complete tasks by offering incentives or rewards, separating those incentives or rewards into different categories can, without increasing their economic value, increase their psychological value because of people’s aversion to missing out on something.

Now, what has this got to do with you – as a financial planner?

When following up on Dave Ramsey’s advice, people with multiple debts should pay off their smaller debts first because it understandably provides a sense of progress toward financial freedom.

Of course, your analytical brain tells you, this makes matters worse because larger debts are simply accumulating more interest, deepening the pool of debt.

Financial planners could help by offering to split larger debts into two or more smaller ones, say Debt A and Debt B, which may not financially reduce the debtor’s burden, but would at least psychologically reduce it.

This small change, which would focus people’s attention on a larger, more costly debt, could make for a big difference in reducing interest paid.

The Bottom Line

Financial planning isn’t only about wealth structuring, retirement issues or even the financial plan itself.

It’s also about you.

More than likely, the financial planner you are right now is not capable of being a sort of psychologist to your clients.

Because that would feel a major and probably unnecessary change, right?

But why not make it a little smaller?

Why not optimize your financial planning service by offering your debt-clients rewards that fall into two distinct categories. And then allow them access to the second category of rewards only after they have earned one from the first.

Not only would such an arrangement encourage people to pay off debt, but it might also even lead them to some enjoyment of the efforts.

And if that doesn’t sound like you, why not help your clients by splitting larger debts?

That’s a small change every financial planner should be able to do for their clients.

Are you ready to be that financial planner?

The choice is yours.

This article is co-written by Stacy B Miller. Stacy is a content editor and writer at Oak View Law Group. Her passion is writing articles and her profession is getting paid for that. You can find her opinion on financial planning, debt management, investments, etc. in her various articles.

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