Study Finds You Can Psych Yourself Out of Debt

August 21, 2012  |  

We wouldn’t normally recommend that you use delusion as a financial management tool, but in this case…

Researchers at Northwestern University’s Kellogg School of Management have found that if you have a lot of debt, you’re more likely to pay it off if you focus your energy on the smallest balances. Usually, the advice is to go after the biggest bills or those with the highest interest. Ultimately, especially in the case of that higher-interest debts, paying those first could save you money.

But in the interest (ha!) of paying off all of the debt, it might be best to tackle those things that will give you the satisfaction of accomplishment.

“In other words, it feels good to close an account, and that helps you persevere until you can finish the job,” writes The New York Times. 

“It’s not just how much progress you’ve made towards the goal in the ‘real’ dollars and cents way, but the idea that you’re crossing off the list,” adds Blakeley McShane, an assistant professor at the school and co-author of the study (along with David Gal).

The professors studied 6,000 people in debt-settlement programs, finding that even where people had the same amount of debt, the person who closed the most accounts was the person most likely to pay down the entire debt.

If you’re working hard and feeling that you seem to be spinning your wheels in place, this might be a method to overcome the negativity. But if you still can’t get past the idea of paying more than you should to eliminate your debt, then keep your eye on the prize is the way to go, even if it means you slog through periods where it seems you’re only shaving tiny amounts off of what you owe. Although you’re not closing a number of accounts quickly, you’re slowly making a debt-free existence your reality.

Someone not involved in this study once advised that when you’re paying down debt, think of it in terms of one dollar at a time: Each one gets you closer to your goal. If paying smaller debts first isn’t your thing, this should become your mantra.

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