By Megan Pacheco, Crosswalk.com
Did you know that your personality greatly influences your finances? Have you ever paused to reflect on how your personal strengths and weaknesses contribute to your current financial position?
The truth is that not many of us think about finances and our unique personality all at the same time. When in trouble or looking for financial help, we most likely seek “expert” advice and “best practices” from those who were able to overcome that particular obstacle. We assume that what worked for that individual will surely work for us, if we just try hard enough. What we seldom or possibly never take into consideration are our own personality traits and how they influence our ability to succeed.
According to Cambridge Personality Research quite a few financial companies are looking at an individual’s personality in order to predict their ability to repay debt! Yes, financial institutions recognize that our character and personality matter greatly when it comes to their financial success, hence they came up with a “personality formula” that gives the highest debt repayment probability. Here it is: If you’re an optimist, have high self-esteem and if you’re not a compulsive buyer, your chances of repaying debt are superb.
So if financial institutions are taking our personalities into consideration, so should we. Especially when it comes to ditching our debt and enjoying a debt-free future.
Finding the “right” method to pay down debt will depend on more than just interest rates and our debt balance. There are at least two schools of thought. One says to pay the smallest balance first and the other suggests tackling the one with the highest interest rate. I would argue that a few more factors need to be take into consideration as you look at eliminating your debt.
Do you get discouraged easily?
If you’re an emotional individual who lacks patience and tends to get discouraged quickly, then paying off your smallest balance first will give you a quicker positive emotional experience and a reason to celebrate. Achieving a quick win will give you a better chance of sticking with your long-term debt repayment plan. Since debt repayment, for most of us, is a marathon and not a sprint, it requires long-term commitment and stamina. Being able to celebrate quick wins along the way will help you stay encouraged to keep going.
If sticking to the plan and ability to commit long-term are non-issues, then you will do very well with tackling higher interest and larger balance debts first. Your personality type gives you enough natural safeguards against quitting; hence you don’t need to score a win as fast as others. All you need to know is that you’re making a steady progress toward an established goal.
How healthy is your monthly cash flow?
If you struggle with your monthly cash flow, if making ends meet is an issue and you tend to use debt to compensate for your cash deficit, I would suggest tackling your smallest debt first, for a few reasons. You’ll be able to take that payment amount and roll it over to your next smallest debt or split it in half and use one portion to apply to your next debt and the second half to create some breathing room in your monthly cash flow. In order to eliminate debt, you first need to stop using debt. If paying off your smallest balance will give you that extra $50 or $100 a month needed to stop the cash deficit, then you should go for it.
If cash flow is not an issue and you are managing your month-to-month expenses well, tackling your highest interest debt will make sense, especially if the interest rate you carry on that debt is fairly large.
Debt roll down…The most effective debt payoff method
The best debt pay off method includes having a written spending plan (budget) where every single dollar is assigned to a specific spending category and you’re committed to stick to those boundaries.
Commitment to live within your means will make or break your long-term debt repayment.
Choosing to pay smallest balance first versus highest interest rate debt using the debt roll down is a very common and effective strategy to eliminate debt fast. Once one debt is eliminated, instead of absorbing that payment amount into the monthly cash flow, it should be reassigned to the next debt payment, and then to the next one.
So before you dive into your debt repayment strategy, take a few minutes and think about not only how quickly you’d like to become debt-free, but also about your personal strengths and weaknesses that can help or hinder you from being successful in ditching your debt.
Megan Pacheco is a writer and content manager for Finicity (provider of Mvelopes and Money4Life Coaching). She comes with 13 years of experience in the area of personal finances and her tips on budgeting, debt, saving, giving, money and marriage and more have been published by Yahoo Finance, AllParenting, FoxBusiness, DailyFinance, REDBOOK and others. You can contact megan at: [email protected]
Photo courtesy: ©Unsplash