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Article by Martha C. White<\/p>\nArticle by Martha C. White<\/p>\n
Financial experts have long debated the best strategy for paying down debt. Some advise paying off debt in the order of APR, taking on the loan with the highest interest rate first. With this approach, you reduce the amount spent on interest charges every month and free that cash up to chip away at the rest of your debt. Others, including personal finance guru Dave Ramsey, advise tackling your smallest debt first, regardless of the interest rate; when that\u2019s entirely paid off, you move on to the next smallest, and so on. Which approach is better?<\/p>\n
Well, Ramsey\u2019s \u201csnowball\u201d method eliminates the total number of different debts faster, but in fact it is also likely to result in paying more in interest over the duration of the debt reduction plan. So the smarter approach, then, is to first pay off the debt with the highest interest rate, right?<\/p>\n
Actually, wrong. In light of the results of a new academic study, science has weighed in on the issue, and it turns out Ramsey is right. People who pay off the smallest debt first are more likely to be successful at eliminating all of their outstanding balances.<\/p>\n
This isn\u2019t really logical. It make more sense, mathematically, to target your debts in descending APR order. But people aren\u2019t logical. A new paper by two associate marketing professors in Northwestern University\u2019s Kellogg School of Management explores the psychology of motivation that kicks in when we\u2019re working towards a long-term goal like debt elimination.<\/p>\n
The two researchers, David Gal and Blake McShane, studied the records of thousands of people who participated in credit-card debt settlement programs and took a look at the results of their efforts to become debt-free. The study compared people who used the \u201csnowball approach\u201d recommended by Ramsey and others with those who took the \u201crational approach\u201d of first paying off the cards with the highest interest rates. Consumers who utilized the less rational \u201csnowball\u201d method were more likely to actually eliminate credit-card debt.<\/p>\n
\u201cYou\u2019re seeing the human element in this aspect of personal finance,\u201d says the paper\u2019s lead author, Gal, explaining why a strategy that theoretically should cost more money in the long run due to higher interest payments is more successful. \u201cWe conclude that there is evidence that the mere existence of achievable subgoals motivates early goal persistence,\u201d the study says.<\/p>\n
To Ramsey and others, it doesn\u2019t matter if a debt-payment strategy is entirely rational or not. What matters is if it works. \u201cWhat I have learned is that personal finance is 20% head knowledge and 80% behavior,\u201d Ramsey explains on his website. \u201cYou need some quick wins in order to stay pumped enough to get out of debt completely.\u201d<\/p>\n
Motivation ebbs and flows throughout the process of striving for any accomplishment. Snagging a \u201csmall victory\u201d by completing any distinct portion of your overall goal (in this case, paying off individual debts) acts as a sort of motivational \u201cbooster shot.\u201d It gives us proof that our efforts are paying off, and instills confidence that we can accomplish what we\u2019ve set out to do.<\/p>\n
\u201cThere\u2019s a lot of research that suggests perception of progress towards a goal is motivating,\u201d Gal says. \u201cEven if you don\u2019t make absolute progress, that perception of progress is motivating.\u201d<\/p>\n
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Article by Martha C. White Financial experts have long debated the best strategy for paying down debt. Some advise paying off debt in the order of APR, taking on the loan with the highest interest rate first. With this approach,<\/p>\n","protected":false},"author":1,"featured_media":365,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_convertkit_post_meta":[],"footnotes":""},"categories":[2],"tags":[],"class_list":["post-364","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-life"],"yoast_head":"\n