This weekend an article on personal finance caught my attention. Jason Zweig at The Wall Street Journal commented on unexpected and fleeting jumps in investments to particular stocks and funds. He views these fluxes as the outcome of individuals attempting to throw a “Hail Mary pass”: irrationally dumping as much as possible into a particular investment vehicle in the hopes that it will buck the market trend and provide returns that recoup the broader losses in one’s portfolio. Finance professor Alok Kumar at the University of Texas demonstrated through research that when income decreases, sales of lottery tickets actually increase. Part of the explanation is that people want to feel hope, and specifically hope that they can live up to the standards of their neighbors.
From a debt standpoint this approach is the worst, in part because those in debt are more likely to make these risky gambles using credit rather than funds they might have on hand. Also, when gambling, losses are more likely than gains, and the resulting losses do compounded damage to one’s financial status. Taking an additional shot of losses means increasing the challenge of completely eliminating debt, increasing the difficulty of raising one’s credit score, and as a result making one unprepared for any financial emergency. And when financial emergencies do appear, it is those who are in debt that pay leaps and bounds more than someone who has access to legitimate savings.
Rather than bet money or get into debt making wild, last-ditch bets on beating the market momentarily, focus instead on paying off all existing debt: now matter how spectacular gains are even if you do win on the market, the interest on credit card debt eats away any ultimate gains.
1. Examine and understand all existing debt.
2. Prioritize debts from most to less pressing to pay off.
3.Set up a basic budget and determine your monthly discretionary amount; decide on debt reduction payment amounts.
4. Set up a basic plan to pay off debt.
5. Create a straightfoward way to monitor your progress month by month. Adjust contribution amounts and budget accordingly.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: credit card interest rates, debt, debt and investing, debt and investments, debt elimination, Debt Management, Debt Paydown, debt plan, debt reduction, debt strategy
