The Moolala Method is rooted in the observation that smart people often do dumb things with their money. I have certainly fit that description at times over the years, and perhaps you have too. When it comes to high interest debt, there are lots of reasons why someone might carry it for a short period of time – a job loss, unforeseen repairs, the Holt Renfrew 60% off sale etc – but over time, paying the 19% + interest that many credit cards charge just doesn’t make financial sense.

In the Moolala workshops, and in the upcoming book, we look at the four basic reasons why smart people do dumb things with money. I call them the “C Factors” and in this newsletter, I am going to focus on applying the C Factors to the subject of debt.

Context: If you don’t have a context for eliminating your high interest debt, it can be brutally hard to tackle it. The process itself isn’t much fun and changing habits can be really hard, so getting clear on why you’re doing it can make a big difference in your success. Ask yourself what difference it will make to you and your family if you address your debt. You might say your debt reduction plan is for peace of mind, lower stress, or a chance to save for things you really want. Whatever your answer is, creating a context, or getting clear on why you’re focusing on debt, will increase your results immeasurably.

Consequences: Even smart people are sometimes unaware of the tangible and intangible consequences of carrying high interest debt. Take a few minutes to calculate the tangible or financial consequences for yourself. Gather up those credit card statements, add up all the outstanding balances and look at how much interest you’re paying each month. Then pop the amounts into a credit card calculator, like this one. It will show you how long the cards will take to repay at your current rate, and how much interest you’ll pay for the privilege.

Even more pronounced than the tangible consequences, are the intangible or emotional consequences of carrying high interest debt. For many people, the debt burden leads to anxiety, stress, guilt and conflict in their relationships. You can’t put a number on these consequences, but many people remain oblivious to their impact and therefore stay stuck in their current situation. For you personally, what are the intangible consequences of carrying the debt?

Complexity: Once you’ve created a context for debt repayment and you’re clear on the consequences of your situation, you can develop a simple plan to get yourself back on track. Smart people are better able to do smart things with their money when they keep complexity as low as possible. What is a simple, simple, simple plan to conquer your debt?

§ Minimize new spending: Remove the cards from your wallet (one recent participant froze them in ice in her freezer). Consider cutting up your store cards altogether as they often have the highest interest rates.

§ Reduce interest costs: Investigate a low interest line of credit from your bank. You might be able to get one that is secured against a property or mutual funds.

§ Consider ways to raise a lump sum or improve cash flow: Sell your second car, move to a smaller house, get a roommate get a second job.

§ Devise a repayment plan: You can either pay off the highest interest card first, or the one with lowest balance to give you some immediate gratification. Set up automatic withdrawals from your bank to your credit card to coincide with payday.

Community: The fourth reason why smart people do dumb things with their money is that they don’t engage their community in helping them get on track. Most people don’t talk about money and so they don’t benefit from the support, accountability and ideas that friends and family provide. Sure, it will take something to reach out and talk to others about your debt repayment plan, but it is one of the best ways to ensure you stay on track. Who could you make a promise to about taking action on your debt?