Forget Your Senses to Make Cents

by David Ning · 11 comments

This Make No Sense, But It Does Make Cents.

At the heart of our financial issues are the numbers. Whether it’s investing or savings or retirement accounts, there are usually mathematical formulas that we should understand. I consider myself a logical person, and many of these principles come natural to me. However, I’m finally starting to see the psychological benefits of going against logic.

It might make sense to borrow as much money as possible on your mortgage and invest in long term appreciating assets, but it’s not for me. It may make sense at some level, but I bet I will keep more of my money by not following this advice, and I know I will be happier in the process too.

Here are a few more examples:

  • Pay the Smallest Debt First – Many people ask me about this one, and it’s clear to me that most people should pay the smallest debt first instead of the one with the highest interest rate. If you are in this camp, you should consolidate your debt into several low interest options, but once you are done, the psychological benefit of eliminating bills will motivate you to get rid of them much faster than any difference in interests you are paying.
  • Pay Off Your Mortgage Early – We touched on this one, but let me add to what I said. No one became poor by having no debt period.
  • Cut Up Your Credit Cards – I still have my credit card, but there are instances where I bought something because I just could. Everyone should get at least 1% back from their credit card purchases, but is it worth it? Decide based on how discipline you are, no matter what the numbers tell you.
  • Invest in Index Funds – Unlike most index fund evangelist who cites that most people can’t beat the index, I firmly believe that you can do better if you know what you are doing and have the time to figure it out because I have. Yet, I’m moving my money into index funds. Why? Because stock picking is a job, and it requires dedicated time and comes with stress. My time is much better spent on trying to grow my business, and it’s more profitable too.
  • 30 Day Rule – I am growing to love this rule, because all you need to do is wait 30 days to buy anything you all of a sudden really want. 99% of the time, the desire fades away and saves me tons of money.
  • The More You Buy, The More You Need – Logic tells me to satisfy my needs whenever they arise, but our mind doesn’t seem to work that way. The more frequently I’m buying, the more I want to shop. The more money I allocate to a hobby, the more I think about it and the more I want to buy something related to it.
  • The More You Give, The Happier You Are – Selfless people always give, but it’s the selfish people that should actually think about giving more. Many people can tell you that giving always bring a smile on your face. And even if you don’t want to do it for others, you should still try because of what it does for you.

All of the above work because it takes discipline out of the equation. Delaying your mortgage may make sense, but do you have the discipline to stay the course in your long term investments? Credit cards give you a discount on everything you buy, but is it really the same as needing to go to the bank every time you want to make a purchase?

Going against the math may never make sense. But for many of us, it will make cents.

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  • Alan Spiegelman says:

    Interesting ideas, but I have to disagree with your suggestion to “pay the smallest debt first.” This strategy might help people find happiness, but bliss through ignorance, to me, is not the best financial strategy for people to pursue. it’s definitely not the most efficient way to achieve financial security nor independence from bills and debt. One way to get psychological AND financial benefits is to write down specific goals for to pay off debts and save. Week by week, month by month, goal-setters who target their high interest rate bills first can achieve financial goals faster by maximizing the debt-decreasing impact of their hard-earned money. And at the end of the day, what could make someone with debt happier than that?

  • Cd Phi says:

    I totally agree with paying the smallest debt off first because it does give you some peace of mind. Psychologically, it’s a relief to even pay off one thing, despite how large or small it is.

  • Good article, I especially like the idea about waiting 30 days to see if you still need something.

    In the end, it all boils down to discipline. If you can use credit cards and pay off the balance, do it. You can get a lot of free rewards. If you are complusive spender, then tear them up.

    What works for one person may not work for the other. In the end, that person should know his or her limits and stick to them.

  • marci says:

    I think it depends on how small your smallest debt is… 1. It’s nice to get “something” paid off…. 2. Sometimes by getting rid of that one payment it can ease up your cash flow, making things a bit less stressful. Even tho you know you are going to put that payment money towards the next debt, there is that “safety cushion” of not having to pay it in case of a real emergency.

    If there is not a really small debt, for that “jump start”, then I’d definitely go for the largest interest one first.

    Paying off the Mortgage Early – Besides peace of mind and sleeping more soundly, this Opens UP your equity via a Home Equity Line of Credit. Those who say the money is tied up in the house and not available for use, can make the money easily available via a HELOC if needed. Not that I would encourage that, but it does make the money available in an emergency 🙂

    • MoneyNing says:

      I actually think that HELOC is a great alternative to emergency funds. Of course, this is only recommended for those people who won’t abuse it thinking that their house is some type of an ATM machine.

  • Cheng says:

    I love shoes but the less I buy, the less I somehow want them.

    I’m starting to understand that not satisfying my desire will help me want less. It’s backwards but it works for me too.

  • 2 Cents @ Balance Junkie says:

    I don’t think that borrowing money against your home to buy long term appreciating assets is EVER a good idea. You are risking the roof over your head in order to invest in “assets” with no guaranteed returns, and possibly huge losses. Why not pay down your mortgage, secure your place of residence, and receive a guaranteed tax free return at your mortgage rate? After all, isn’t your home as much a “long term appreciating” asset as a stock or bond investment?

    • MoneyNing says:

      I don’t think a home is ever an investment, but I totally agree that borrowing money to make money is not the right idea for most people.

      While the idea sounds right, most people will lose money doing it.

  • Vincent says:

    I’m not sure if I agree with forgetting about common sense but point well taken. I still like paying off the highest interest rate first but I agree that it’s not for everyone.

  • Joshua says:

    I too have started paying my smallest debt first. It’s amazing how motivating it is to be able to cut up your bills. Thanks for the reminder.

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