http://www.marketwatch.com/story/financial-experts-may-have-gotten-this-wrong-for-years-2015-08-18?siteid=YAHOOB
People in debt have been getting less-than-stellar advice for years now, a new study suggests.
Many financial experts — the famed Suze Orman among them — have told Americans this piece of financial advice: If you’re in debt, focus on paying as much as you can on your highest interest debt and the minimum on all others — and do this until your debts are paid off.
On paper, this makes sense, as it means you’ll pay the least amount in interest, because you’re paying down the highest interest items the fastest. “The mathematically optimal debt repayment method is to first pay off the debts with the highest interest rates,” explains Peter Lazaroff, a certified financial analyst at Plancorp in St. Louis. “This means making minimum payments on all of your debt, while paying off whatever additional principal you can on the highest interest rate loan.” Or, as New York-based certified financial planner Stephanie Genkin puts it: “Tackling the most expensive debt makes sense: the goal is to save as much money as possible.
But in reality, this strategy might not work — at least according to a new study published this month in the “Journal of Marketing Research”. The study had participants do a tedious Excel assignment three different ways: By completing small parts of the assignment first and longer parts later; or by completing the assignment in equal parts throughout; or by completing harder/longer parts first. The result: The participants completed the assignment faster when the tasks were arranged from smallest/easiest to largest/hardest.
“Winning what are known as ‘small victories’ by paying off small debts first can give consumers a real boost in eventually paying off all their debts,” write the authors of the study. “The reason is that meeting a small goal provides the motivation to then meet a larger goal.” Their conclusion: “Paying off small debts first may get you in the black quicker.”
Financial experts say they’ve seen this method work in practice too. “You can’t always live in a spreadsheet,” Lazaroff explains. “Paying off the loan with the lowest balance, and not necessarily the highest interest rate, can provide an emotional benefit as a result of progress.”
I WOULD THINK THAT PAYING OFF THE SMALL ONES FAST WOULD IMPROVE ONE'S CREDIT SCORE, AS WELL...
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