An albatross around your neck. A monkey on your back. Whatever you call it, consumer debt can be a huge burden. While there are a number of different debt reduction strategies out there, I wanted to take a moment to highlight a useful technique that my pal NCN used to dig his way out of debt: micropayments.
Taking a step back, most debt reduction strategies involve ranking your debts (smallest to largest, highest to lowest interest, etc.) and then throwing everything you can at the top-ranked debt while making your minimum payments on everything else. This is all well and good, but what if you want to pay things down even faster?
Enter micropayments… In short, pay what you can afford, and then scrape together whatever else you can during the month and send in multiple, smaller payments to your creditor of choice. Believe it or not, NCN got to the point where he was sending Citibank an extra $5 each and every day via online billpay. By making a game out of finding an extra $5/day, he managed to stay motivated and slay the debt beast well ahead of schedule.
Beyond helping you pay things down extra fast, this approach helps you push your debt reduction limits without getting overextended. If Murphy pays you a visit, you can easily ratchet back on your micropayments and keep your head above water. But if not, it’s full speed ahead.
Not sure where you can come up with a few extra bucks? Get creative. Skip your morning Starbucks, carpool once a week, sell some stuff on eBay, pick up a paper route, do paid surveys online, start a weblog, have a garage sale, etc. Whatever you do, channel that extra money toward your debts. Before you know it, you’ll be out of debt and saving for the future.
Sound good? Then be sure to check out NCN’s post. You should also note that the same concept can be applied to savings goals. And for a more recent take on the micropayment concept, check out the “snowflaking” primer over at paidtwice.
If there’s a limit to pay online, use checks (I’m sure there’s a few of us still around). I just starting sending $25 checks every few days. I’m old school. I don’t pay anything online.
I love this idea. Not only is it brilliant but practical. I think actually if you use the debt roll down strategy and then use the micro payments for the other debts it can be a successful marriage of the two strategies. I especially think that people can find at least 5-10 bucks a week to do for this purpose with all the money we waste on stuff. Thanks for the tip.
Brian: You can circumvent most limitations on payment numbers by using your own bank’s online billpay service instead of the creditor’s “click-to-pay” service.
Sounds interesting although you may be right that the benefit is mostly psychological. Also, keep in mind that most sites only allow a certain number of electronic payments per month, so make sure you check it out first. You don’t want to use them all up and then not be able to make your “real” payment at the end of the month.
I found that I avoid late fees on credit cards by using a micropayment-like scheme — I send the minimum payment when I get the bill, which is a good week or so before it’s due. Then I pay off as much as I can afford to just before it is actually due.
“g” is an idiot. Handling your books (both personal and business) in Quicken/QB/Money and taking care of your billpays takes NO MORE than 15 minutes of each weekday, usually less than 3. Some days all you need is 30 seconds to download, approve, and annotate your transactions.
Get a life, you privileged snob.
Can we afford to give up a latte every day to pay off debt? Sure. The more debt we get rid of the more money we have later.
The more you pay off now means you’ll have even more cash in your hands to pay even more off soon. It has a snowball effect.
@ g-
Obsess? It takes about 1 minute to send an online bill payment to a Roth IRA or to send in a credit card bill via bill pay.
I guess if folks will find a way to say, “I can’t afford to send $10 a week to my IRA”, I guess they can find a way to suggest sending in a payment a few times a week is obsessing and will take away time from hobbies and family time.
I get paid weekly, so I make weekly payments on my credit card. On payday, I put enough in my “expenses” account to cover (approximately) 1/4 of my monthly bills, 1/2 of what’s left over into savings, and then approximately 1/2 of what’s left after that toward my credit card debt. I don’t think about it as not having as much money because I barely had it at all (since I transferred the money on payday). And I still have money for those fun and daily things during the week.
It’s certainly helped my balance shrink, that’s for sure!
I think it works if you make it a game to save $5 dollars a day. If you stay motivated, it should work. I thought some Credit Card companies won’t allow you to pay payments to a card daily, you can make payments weekly? Not sure if the rules have been changed.
If only for the sake to provide an alternative point of view: Life is too short to obsess about bills (daily payments. . .)! I am all for paying debt off, keeping out of unreasonable debt, and financial responsibility; however, at some point it will take time away from more important aspects of your life (job, family, hobbies, etc).
Although, I do concede that it works well by paying less in interest and by keeping you intellectually involved in the process.
that’s a very cool idea! i kind of do a similar thing with my ING account; i’ll make measly weekly deposits to my emergency fund.
Re: Ben’s comment. I did run into a limit of bill pays with Citibank. But I quickly figured out the limit was only with Citibank’s bill pay tool. I could push as many payments from Wachovia to Citibank as I wanted via Wachovia’s bill pay tool.
Sometimes there’s a cap on the number of payments you can send in a month. I know my citicards have a cap at 4.
Also make sure this doesn’t cost you more if you have to pay fees of any kind for sending the payment in. You’ll end up loosing more in the long run.
Interesting concept. Obviously it works according to all the comments.
This is a great idea. By making frequent payments you eliminate the risk of frittering that money away right out of your primary checking account.
I think this is a great idea and I have been doing this for a while now both for credit card payments AND investing. Think about it. You probably have FREE billpay in your checking account online. The banks make it sooo darn easy to send off money. Just this past month, I sent off probably 5-payments to my credit card before I got the actual bill.
I also try to tell all of my friends/family/clients/colleagues that they should open a brokerage account. And they ALWAYS have some bull-crap excuse hat it takes too long and they “don’t have the money”.
Well if they don’t have the 5-minutes it takes to set up the account and they can’t part with $1.50 a week, if that is all they can afford, than shame on them.
I am ALL about micropayments. Everyone with an excuse no longer has one with the advent of online billpay.
I used the snowflake method when were paying off our debt ($55,500). Now that we, like NCN, are working on saving $50,000 this year, we still use the snowflake method.
Those little payments/savings help me stay engaged with my money plan.
This technique really does work. I used it to not only pay off my debts (and have a little fun) – but I also use it to fund my savings account. I make twice-weekly withdrawals from my checking to my savings… plus, anything extra that I earn from eBay, that goes directly to my savings, as well. Over time, these small savings begin to add up. I think that main point is… you do NOT have to wait until you get a bill in order to make a payment.
This is a great concept , I can see how it would be easy to be motivated by the “game” , the snowball concept is easy but does get a little long between months !!!