Have you ever heard of a "quick win?"
It's the idea that one small triumph (say, negotiating your cell phone bill down $20) gears you up for another. Then that win spurs you to the next, and so on, until the momentum from your string of accomplishments brings you to your ultimate goal.
A new study from Northwestern University’s Kellogg School of Management finds that these small achievements are crucial when it comes to tackling a major financial hurdle: paying off debt.
Researchers found that when facing a mountain of debt, paying off the smaller bills first greatly increased a borrower's chances of paying their debt in full. Of course, these wins aren't as fast as negotiating a cheaper cell phone rate, but the same idea applies—the satisfaction of checking an obligation off the list serves as motivation to tackle the next. According to their data, the better predictor of whether a borrower will reach success is more likely to be the total number of accounts closed, rather than the total amount of money paid off.
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This concept may, in some cases, contradict the major school of thought when it comes to debt repayment: Pay the "most expensive" debt first—that is, the balances with the highest interest rates—in order to save more money in the long run.
These findings suggest that our brain's influence may outweigh our black-and-white balances. Prioritizing the most expensive debt may save more money in the long term because the influence of immediate (well, more immediate) gratification has proven hard to resist.
While everyone's financial situation—not to mention money mindset—is different, those of us hacking away at our debt just might end up with the perfect storm of the psychological and the logical: our highest-interest debts also end up being our smallest.