What is emotional debt and how do you overcome it?

Dealing with the liabilities that cause you the most stress can lift a huge burden from your shoulders

Adopting different ways to clear debt, such as the Avalanche, Snowball, Kiyosaki and Emotional methods, can be an effective approach, financial experts say. Alamy

When I first started to host group workshops or talks on personal finance, I was surprised to see the most positive and detailed feedback was on the sessions that addressed debt.

Perhaps predictably, the debt sessions tended to be the least interactive. But the feedback I received from participants was on how (surprisingly) interesting they found the topic.

Participants wrote to tell me that they had found a way forward that makes sense to them and they now feel secure and motivated.

So maybe there is more to managing debt than blindly throwing as much money at the problem as possible until it goes away.

What piques people's interest are the four best approaches to clear debt. Namely, the Avalanche, Snowball, Kiyosaki and Emotional methods.

What are they and what is the difference between them?

The Snowball method is when you focus on the smallest debt first. This way, you can obtain a sense of achievement faster by clearing at least one debt quickly.

The Avalanche method is when you target the debt with the highest interest rate first. This may not be the fastest method but it’s the cheapest way to pay off your debt. If finding the cheapest way possible is a motivation for you, this is the one to consider.

The Kiyosaki method was created by Rich Dad, Poor Dad author Robert Kiyosaki. Pay the debt with the highest monthly repayment first. Once that is paid, you have the largest amount of cash available to you to use to pay off the rest of your debt.

The least considered approach is the Emotional method. This is when you target the debt that causes you the most stress.

It could be a debt for something you no longer own or regret. It’s often related to lifestyle debt.

It could also be the result of a poor relationship with the lender. I recently worked with an individual who was the victim of a smaller scale Tinder Swindler-type scam.

She took out loans to help her boyfriend, only for him to promptly disappear. She was left with three loans and no money. These loans caused her a lot of stress.

Sometimes there are motivations from more than one approach.

I worked with a couple who are reconsidering their mortgage arrangements.

They have four motivations for doing this.

Their agreement carried a higher interest rate than the current market rates. Their house is worth significantly more than their current mortgage amount and they would like to release equity to consolidate other expensive loans.

They also need cash to carry out some essential maintenance work on their home. And lastly, they strongly disliked the frustrating, poor, insulting and often confusing customer service at their current bank.

Switching mortgage providers in these circumstances makes sense both financially and emotionally.

But they hesitated and got stuck when their bank offered them a very low interest rate to remain.

Taking this offer had many benefits. They would pay a lower interest rate (Avalanche), they would reduce their monthly debt obligations (Kiyosaki) but they would not rid themselves of the toxic relationship with their bank (Emotional).

This had confused them and they were unclear as to what they “should” do.

How do you approach a situation like this? The first step is to rank your motivations in terms of importance.

Traditional advice would be to choose the cheapest option as that will save you the most money.

But while saving money is always a major consideration, it does not always improve people's lives. What was going to reduce their stress levels more, give them a sense of accomplishment and help them sleep better at night?

Despite the couple's considerable frustrations with their current bank, the financial benefits of a lower interest rate outweighed their feelings. They chose to take their bank's offer and are planning to reassess the situation in a year.

All is not lost from an emotional front; they are confident and content with their decision as they feel they have considered it thoroughly and made the right decision.

Another couple may have made a different decision and that would be right, too.

What’s important is ensuring you look at the situation from all angles to help you make an informed decision after considering both the financial and emotional impact. How can you then be wrong?

Carol Glynn is the founder of Conscious Finance Coaching