Being in debt has become a way of life for many people. Car loans, mortgages, and student loans can really start to add up after a while, and it may seem that getting rid of all debt is an impossible task. So where should you begin chipping away at it? While common sense may lead you to paying off high-interest loans first, a new study shows that paying off your smaller loans can give you the motivation to tackle some of the larger and more troublesome ones.
The study in question was conducted at A&M University by Alexander L. Brown and Joanna N. Lahey. They believe that it is easier to pay off loans if indebted people take steps to put themselves in the right state of mind.
“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...the reason is that meeting a small goal provides the motivation to then meet a larger goal,” said the authors.
Tackle small tasks first
Brown and Lahey tested their hypothesis by conducting an experiment in which participants had to retype 150 ten-character strings in a Microsoft Excel workbook. The larger task was split up into several different sections; some participants completed the work from most lengthy task to least lengthy, others worked on the tasks in equal parts, and still others worked on the tasks from least lengthy to most lengthy.
The authors found that subjects were able to complete the whole set faster when it was broken up by ascending length (least lengthy to most lengthy). They also found that subjects tended to speed up their work when they were nearing the end of a certain section of their work. However, they worked most slowly when beginning a section; this suggests that a person’s motivation is at its peak when they are almost finished with a task.
This experiment shows that people are able to motivate themselves to complete a large undertaking if they split the work up and start with the smallest parts first. By completing smaller and more manageable tasks first, people allow themselves to accrue motivation. This feeling of accomplishment is what allows them to push forward and complete the more arduous tasks that they might have to undertake. This thought process can greatly help people who are paying off debt or managing their finances.
Find what works for you
"The increased motivational benefits of small victories may make it beneficial to pay off debts from smallest to largest in some cases, ignoring interest rates,” said Brown and Lahey. However, they caution that there are limits on how effective this approach can be. “The increase in motivation may not offset the additional interest accrued by not paying,” they said.
As always, it is best to consult a financial advisor if you are not sure how to handle paying off your debt. Although the authors’ approach may work for some, it is not necessarily going to be the best course of action for everyone. Their full study has been published in the Journal of Marketing Research.