A new way to look at paying off debt


Most of us look at getting out of debt as an exercise in restraint -- giving up consumption to improve our financial situation. It's the financial equivalent of eating a plate full of broccoli.

But Hersh Shefrin, a professor of behavioral finance at Santa Clara University, told the New York Times about a new way of looking at debt. By paying off high interest debt as quickly as possible, you reduce the amount you will have to spend each year servicing the debt -- freeing up thousands off dollars for other things, including conspicuous consumption, if you must.

Think about it this way: If you have a debt of $1 thousand with an interest rate of 20% APR, you'll spend $200 per year servicing the debt -- without even touching the principal. But if you can pay it all off now, you'll have an extra $200 per year to blow on collectible plates or $55 dollar video games.

The emerging science of behavioral economics provides great strategies for improving your financial life. To lean more, check out Bert Whitehead's book Why Smart People Do Stupid Things with Money: Overcoming Financial Dysfunction.