Getting rid of debt seems to be many people’s number one priority. They realise they need help with their debt. The sheer number of personal finance blogs, or PF blogs as they have come to be known, dishing out debt advice makes this clear. For many of us, however, eliminating debt is a bit of a balancing act. Things do not always happen in exactly the way we’d like them to nor do we always stick to our budget/principles/guns in exactly the way we had intended to.
One of the biggest obstacles in our path to a debt-free future is that of indecision. This happens when we have too many options available to us. It’s similar to when we’re standing in front of the toothpaste aisle and 897 toothpaste brands stare back at us. All the options look equally good and therefore we feel unsure that we’re doing the right thing.
Let’s take an example that many people may be struggling with right now. Perhaps one of Planting Dollars’ readers is wondering what to do about this problem at the moment. They have a credit arrangement with a fixed monthly instalment and they have a personal loan or credit card with a high interest rate.
Thanks to a raise or their parents or a small miracle, our reader has some spare money to put towards their debt. This is good news, right? Well, yes, it is but our reader is slightly confused over which channel to direct the money to. And it’s not surprising because both channels look equally tempting.
Putting the extra money into the credit card or personal loan may mean saving quite a bit of money on interest if it doesn’t attract penalty charges. It’ll also mean paying off the credit agreement in a shorter period, which will free up some money to help reduce other debts – eventually.
The other option – though there are more than just two options here – is to pay off the item with the fixed instalment. This works especially well if the item’s value is equal to the disposable amount of cash available to our reader.
The answer – yes, there is one answer – is that both options are potentially great. No one option is better than the other. It really depends on what our reader wants. If they want to improve their cash-flow for the next couple of months, then that’s a good choice. Or perhaps the interest on the loan or credit card is giving them too many worries so they decide to eliminate it by as much as they can – for now. That’s also good.
The best option is to do what makes it easier to sleep at night. Some people feel more secure with knowing they have a security blanket equal to 3- to 6 months’ living expenses while others are OK with having easy access to credit in an emergency.
Remember that, though we like to think of ourselves as rational creatures, the only true rational creature is a computer. We humans have messy things called emotions that run our lives and they often get to decide not only which toothpaste brands we get but also make many of the financial decisions in our lives. Don’t give them too much free reign but realise they are there and they do exert plenty of control.
Charles Howson is the CEO of Debtsolver and a financial expert in the debt industry in the UK. Debtsolver is a financial services provider offering debt solutions such as debt management, debt consolidation and IVAs.