Paying off high interest loans first would seem the most logical way to start getting finances back under control.
But paying off the smallest debts first might provide the motivation to get rid of even the heaviest debts, according to a study in the Journal of Marketing Research.
“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,” say the authors of the study, Alexander L. Brown of and Joanna N. Lahey of Texas A&M University.
“The reason is that meeting a small goal provides the motivation to then meet a larger goal.”
The researchers found that test subjects during the study completed a tedious task faster when it was broken up into parts in order of ascending length compared to descending or equal lengths.
Further analysis showed that people sped up as they approach the end of Excel columns and slowed down at the beginning of columns. Motivation increased as the end of the task got closer.
On balance, they completed tasks faster when the tasks were arranged from smallest to largest, confirming that the small victories approach is effective.
“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,” write Brown and Lahey.
“The increase in motivation may not offset the additional interest accrued by not paying.”
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