Balancing Rational Advice With Irrational Brains

by | Jan 20, 2011 | Cash Flow, In The News | 4 comments

I’ve had an interesting conversation on Twitter recently where I was “tweeting” (that’s “talking” for the over-50 crowd) about a research study that indicated when paying off debt, there is no advantage psychologically to paying off the smallest debt first.  Instead, you should apply your funds to the highest interest rate debt.

Of course, paying off the debt with the highest interest rate makes rational sense.  When just doing the math, it always is the better financial decision.  Still, the study suggests that the human brain is wired to pay off the smaller debt first.

This research is directly opposed to what one national talk show host, Dave Ramsey, suggests, which is to pay off your small debt first.  It’s a position I have also held in the past, one which I am rethinking in light of the research. 

Michael Kitces wrote a nicely balance article exploring the rational and irrational sides of this debate.  He writes:

The purpose of this blog post is not to debate whether Rick or Dave is smarter, or even about which is the better approach to debt management. The point is that we have two smart people with some real experience guiding people through debt issues, who seem to have used all of their smarts to come up with two completely opposite conclusions about the “best” way to tackle a serious issue. And the difference between the two ultimately boils down to one single issue: behavior.

It’s an interesting debate.  To read Michael’s full post, click here.

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