10 Simple Steps to Pay Your Debts

and Become Debt-Free by Clark B. Hinckley

This plan will work for almost everyone, even if you think you are hopelessly in debt. It takes
discipline and perseverance, but so does everything that is worthwhile. It may seem hard, almost
impossible, at first. Living the Word of Wisdom may seem impossible for a life-long smoker, but
do you doubt that he can do it, or that he should, or that he will be blessed? You can pay your
debts. You should. And you will be blessed.
But first, a word about why. In a world filled with voices that encourage us to spend more than we
earn (think unsolicited credit card offers, 100% loan-to-value home equity lines of credit,
adjustable rate or option-ARM mortgages, 5-year car loans, auto leases with nothing down, etc.),
sometimes sacrificing to pay our debts doesn’t seem to make a lot of sense. As with any Gospel
principle, understanding the doctrine helps us realize that the Lord’s ways are different from
man’s ways.

What the Scriptures Say

Mosiah 4:28 "And I would that ye should remember, that whosoever among you borroweth
of his neighbor should return the thing that he borroweth, according as he doth agree, or else
thou shalt commit sin."
D&C 19:35 "Pay the debt thou hast contracted with the printer. Release thyself from
bondage."
D&C 64:27 "It is said in my laws, or forbidden, to get in debt with thine enemies."
D&C 104:78 "It is my will that you shall pay all your debts."

What the Prophets Say

Brigham Young: “Pay your debts…do not run into debt any more.”
Joseph F. Smith: "If there is anyone here who is in debt, I would advise that when he goes
home, and when I go home, too, that we will begin with a determination that we will pay our
debts and meet all of our obligations just as quickly as the Lord will enable us to do it."
Gordon B. Hinckley: “I urge you as members of this Church to get free of debt.
The First Presidency (Feb 2008): "We are concerned that some Church members ignore the
oft-repeated direction to ... avoid consumer debt."
Thomas S. Monson: Debt can “crush our self-esteem, ruin relationships, and leave us in
desperate circumstances.”
Thomas S. Monson: "Changes occur: people become ill or incapacitated, companies fail or
downsize, jobs are lost, natural disasters befall us. For many reasons, payments on large
amounts of debt can no longer be made.”
Provident Living website at www.LDS.org: “Honor your debts. We are a people of
integrity. We believe in honoring our debts and being honest in our dealings with our fellow
men.”

Debt Reduction is Your Best Investment

If obedience to divine commandment is not enough motivation, consider this: paying off debt
is the best investment you can make. Think about it. An investment guaranteed by the Federal
government (such as an insured bank CD or a Treasury Bill) might yield 5% in good times. If
your marginal tax rate is 25%, such an investment would yield 3.75% after-tax. Paying off a
credit card with a rate of 18% yields a full 18% after-tax (since credit card interest is not tax
deductible). Where else can you get an 18% yield with no risk of loss? Nowhere!
Page 1
2/18/2009
Before You Start
Ask someone to be your advisor and confidant as you follow this program. This person may be a
family member, a home teacher, a quorum leader, a close friend, an accountant. Be wary of
financial advisors or paid credit counselors. Have someone to whom you will be accountable, who
can help answer questions, and who can provide moral support and encouragement. This person
does not need to be a financial expert, but they should have some knowledge and experience in
personal financial management. Report to this person weekly on your progress, and consult with
them on any financial matters that come up.

The 10 Steps
1. Make a summary of all your debts that shows the lender, the type of debt (i.e. credit card,
home equity line of credit, mortgage, car loan, etc.) the interest rate, the amount you still owe,
the minimum monthly payment, and the value of any collateral pledged against the loan (this
should be the value if you had to sell the collateral today, less any sales commissions and
expenses). List each indebtedness separately – if you have ten credit cards, you will have ten
separate credit card entries. If you lease a car, include the amount of the lease payment; if you
rent your home, include your monthly rental payment. The attached chart can be used for
this.
Once you have listed all your debts, list your monthly take-home pay (after taxes and other
withholdings), then calculate your total Minimum Monthly Payments divided by your
Monthly Take-Home Pay. This is the percent of your take home pay that you are spending on
debt service and rent.
This is a relatively simple but very important exercise. You may be surprised to find out how
much you really owe in total, and how much of your monthly income is dedicated to
servicing this debt. Imagine how different your life would be if you had the total in the
bottom right corner of this chart going into a savings account every month! That may be a
ways off, but it can happen if you follow each of these steps carefully.
2. Gather up all of your credit cards – all of them, including ones held by other family members.
Make a copy of the front and back of each card, and store this copy in a safe place. Then, with
a pair of scissors, cut up every card. (If you need to travel, you should keep one credit card to
use when you are traveling, as a credit card is essential for airline and hotel use – but pay
charges the same month you incur them).
This may sound harsh, but it is essential to achieving your goal of being debt free. The
number one rule is “Don’t incur any more debt.” This means not charging any purchases or
taking any advances on credit cards or lines of credit. Really. Keep repeating the mantra, “No
new debt, no new debt.” Carrying a credit card in your wallet is asking for temptation. Give
up credit cold turkey. You can’t give it up a little at a time. Make a solemn promise, right now,
to give up debt. No new debt. Period.
3. Now, go back to the chart you made in Step 1. Find the debt that has the smallest balance. In
addition to the minimum monthly payment, find some ways to pay a little more. Take any
extra money you can find and make additional payments on this debt, and keep working at it
until this debt is paid off. Don’t wait until you get a bill – make a payment of any amount
whenever you have some money. Paying early reduces your interest, meaning that more of
your payment goes to reducing principal.
On all the remaining debt, make only the minimum monthly payment (regardless of the
interest rate). The reason you start with the smallest debt is that it is the quickest one to pay
off. Two wonderful things happen when you finish paying off this debt. First, you have a great
sense of accomplishment – you have actually succeeded at extinguishing a debt, and you now
know you can do it! Second, you no longer have a monthly payment to that creditor, and you
can now add what you were paying on that debt to reducing you next debt.
4. Keep a spending journal for one month. While you are working on Step 3, keep a journal for
one month of everything you spend. Everything. Gum, candy, parking meters, eating out,
everything. Then take a look at this journal at the end of the month and determine what you
Page 2
2/18/2009
 can eliminate. There was a time in your life when you lived very well without internet access
on your cell phone; how essential are 50 cable sports channels to your eternal well being? You
will be surprised and amazed at what you can cut if you are serious about this. Almost
everyone can come up with an extra $100 a month; and many can come with several hundred
dollars.
5. Having completed step 4, allocate the extra money you are now saving by using half of it to
pay down that first debt (Step 3), and put the other half in a savings account that you cannot
easily access (no ATM card, no Internet transfers). This money is for emergencies (replacing a
broken water heater, unexpected medical bills, car repairs, etc.). Not sure if something is an
emergency? If you have any question, it isn’t!
6. When you have paid off your first debt (Step 3), choose the smallest debt that is still
remaining and, in addition to paying the minimum monthly payment, include the amount
you were paying on the first debt which you just paid off. One by one, as the months and
years go by (for most people, this process takes several years), you will see one debt after
another disappear and your total indebtedness will begin to shrink faster and faster as your
payments on the next debt become larger.
7. For most people, one of the larger debts they have is a car loan. When you get this debt paid
off, you have made real progress. You should also have some money in your emergency fund.
Your goal now is to make that car last until you have saved enough to purchase a car with
cash. That’s right, cash. Remember your mantra, “No new debt.” That means no car loans
and no car leases. It also means you’ll be buying used cars, not new, at least unless you have a
financial windfall. And in doing so, 1) you will have the satisfaction of knowing that you have
successfully withstood millions of dollars and years of indoctrination by automotive
companies designed to seduce you into thinking you need or deserve that new car smell
(which is a $4,000 option), and 2) you will have the peace of mind of knowing that even in the
face of an unexpected financial setback, you will still have a car.
8. Ultimately, the last debt you will probably tackle is your home mortgage. Somewhere over the
last decade, the idea of actually owning a home free and clear was lost in the myth that a home
was a financial investment. It is not. It is your home. In fact, as an investment, homes have
been nothing more than an inflation hedge – for most of the past 50 years, home appreciation
has averaged less than ½ of 1% a year over inflation. Few things in your temporal affairs can
bring greater peace than knowing that you and your family own a home – no bank can
foreclose on it, no landlord can serve an eviction notice. Except in the very most dire of
circumstances, you will never be homeless.
So when you get to the point when you are paying more than the monthly required payment
on your mortgage, supercharge your efforts. You can dramatically accelerate prepayment of
your mortgage simply by making a payment every two weeks rather than every month (in
fact, you should start doing this immediately). Use bonuses or gifts to further pay down your
mortgage. Nothing else you could buy can bring you as much excitement as looking at your
year-end mortgage statement and seeing that balance decline. Step 9 is simple: ramp up when
you get to your mortgage.
9. You’re near the end of a long journey! When that great day comes that you have made the
final payment on your mortgage and you are completely debt free, find a copy of the original
mortgage which you signed (it’s in the big stack of papers from the closing). Gather the family
together, take the mortgage and match with you, go into the back yard, and ceremoniously
burn your mortgage. Becoming debt-free has brought you almost unimaginable peace and
happiness – not the fleeting excitement which comes but quickly fades when you buy
something shiny, but a real, lasting peace. Congratulations!
10. You did it. You know it can be done. You know the peace which comes from living debt-free.
Now go share your experience with others!

Page 3
2/18/2009
Debt Elimination Planning Sheet

Minimum
Interest Monthly Value of
Lender Type Rate Amount Payment Collateral

Total

Monthly Take-Home Pay

Debt Ratio (total monthly payments / take-home pay )

Page 4
2/18/2009