Financial experts have long debated the best strategy for paying down debt. Some advise paying off debt in the order of APR, taking on the loan with the highest interest rate first. With this approach, you reduce the amount spent on interest charges every month and free that cash up to chip away at the rest of your debt. Others, including personal finance guru Dave Ramsey, advise tackling your smallest debt first, regardless of the interest rate; when that’s entirely paid off, you move on to the next smallest, and so on. Which approach is better?
Well, Ramsey’s “snowball” method eliminates the total number of different debts faster, but in fact it is also likely to result in paying more in interest over the duration of the debt reduction plan. So the smarter approach, then, is to first pay off the debt with the highest interest rate, right?
Actually, wrong. In light of the results of a new academic study, science has weighed in on the issue, and it turns out Ramsey is right. People who pay off the smallest debt first are more likely to be successful at eliminating all of their outstanding balances.
This isn’t really logical. It make more sense, mathematically, to target your debts in descending APR order. But people aren’t logical. A new paper by two associate marketing professors in Northwestern University’s Kellogg School of Management explores the psychology of motivation