How we intuitively manage debt

How we intuitively manage debt

Many people do not effectively manage their debt but juggle multiple debts with different terms and interest rates.

The most effective way to pay off debt is to focus on the loans with the highest interest rates first. However, research shows that consumers who manage multiple debts prefer to reduce the total number of debts rather than reducing the total of their associated costs, even if they will pay more in the long run.

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Why Don't People Manage Debt Better?

blogs.scientificamerican.com

MORE IDEAS FROM THE ARTICLE

  • The Prospect Theory suggests individuals are more sensitive to a loss than a gain of an equal amount. The urge to get in the black is so strong that people are motivated to pay off small debs without considering their interest rates.
  • The Goal-Gradient Theory supposes that consumers are more willing to make an effort towards small debt just to finish paying them off.
  • People do not take into account how interest compounds over time.

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  • We can set up automatic payments to the debt with the highest interest without regarding how much is owed on it.
  • We can consolidate multiple debts into a single loan. If you have five different loans with different interest rates, your loan servicer can consolidate each debt into one payment.

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RELATED IDEAS

The snowball debt method

With this method, you pay off your debts from the smallest balance to the largest balance, regardless of interest rates.

When you pay the smallest debts first, you start to clear your low debts away very quickly. Doing this feels empowering. Once you've paid off a debt, you will have more money to send as an additional payment to the next debt you are focused on (hence the snowball analogy.)

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Refinancing your home

When mortgage interest rates get low, refinancing isn't always the best choice.

Deciding when to refinance your home loan depends on several factors besides whether you can get a better mortgage rate.

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moneyunder30.com

Regular monthly bills

The bulk of your budget is made up of necessities like rent, phone and internet bills, insurance, etc. If you can lower your monthly expenses, you can save a lot for unplanned events.

  • Find a cheaper place to live.
  • Get a cheaper phone plan
  • Find a better insurance company
  • Grocery show once a week, so you don't waste food.

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