Monday, May 12, 2008

Emotions vs. Interest

I've heard different ways of paying off debt. Start with the highest interest rate first and work your way down versus pay off your small debt first and work you're way to your bigger debts. What's the benefit to each way and which is better?

Obviously, paying off your high interest rate debt is going to save you money in the long run. That's a no-brainer, but why would somebody else recommend paying off your small debt first? Psychologically, paying off your small debt gives you a sense of accomplishment and helps you tackle your next debt with a feel good attitude. Based off my experience, every time I pay off an entire credit card, I get a boost of confidence and I feel like I'm actually doing something. For some strange reason, when I pay off bigger debts, it just feels like forever and I feel like my payments aren't really doing any good (even though I know it's not true.)

The reason this has been on my mind is because one of my debts is a little over $2,000. Now I have multiple accounts and I have around $2,000 in the accounts combined that are part of my short term and midterm savings. I can either pay off the entire $2,000 debt and save on the interest I won't be charged or just make my regular "accelerated" payments and keep the $2,000 as my short/mid savings.

Logically this seems simple, but emotionally, it's hard for me to look at my short and midterm accounts and see a $0. I know I'll be saving money if I just pay off the credit card so I won't get charged interest, but for some reason I can't pull the trigger. I thought that if I blogged about it, I should be able to realize the easy answer. It's my emotions vs. the actual interest being charged. Why are decisions so hard to make when the answer looks obvious. If finances were easy, then everybody would be rich, but they're not.

After writing this out, it seems like the best thing for me to do is pay off half the card, and keep the other half in my accounts so I don't have to see a $0 (Which I hate and makes me depressed.)

1 comment:

Odious said...

I've had this exact same problem. You know what you should do, but for some reason or another you just can't. My business partner and collegue is often my voice of reason when this happens. She will usually pursuade me to do the right thing and just pay off that chunk.