When you're in a hole 6 feet deep, the first thing to do is stop digging.

The Washington Post ran a story on how the US went from a surplus (and projected even greater surpluses) to a hellhole of debt which they can’t seem to get out of. It starts with this (h/t: The Big Picture, original here):

The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.

In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses indefinitely. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.

I was struck by the behavioural aspects that are applicable to the above situation:

– Extrapolation from the recent past.
– Inability to predict future behaviour.
– Compound interest leads to compounded behaviour.
– All of the above leading to a loolapalooza effect.

Now, while the above example relates to the US national debt, I believe it is applicable to daily life. Using the example of someone deep in debt.

When you’re in a hole 6 foot deep, the first thing to do is stop digging

The first thing to do is stop paying more in interest to the bank! This means that you repay the interest and pay down the principal as soon as you can. STOP letting interest accumulate on your debt. If you can’t do that at one go then start digging slower- try reducing your principal so that the interest accumulated is lesser.

When you’ve gotten a lucky break, build on it!

When lady luck smiles on you, start paving the way so that you get luckier! Don’t blow it all on a fancy meal, a nice holiday or something that you’re probably not going to remember about when you’re going hungry. Start saving and accumulating geese that lay golden eggs!

If you’ve got those two steps, you’ll never have to worry about going hungry or having no roof over your head.

Note: I’ve been deliberate vague and sketchy about how to get out of debt or build assets because the point of this article is to get the right mental models about being free from debt. My personal belief is getting the principles/thinking right and the methods will come.