Irrational Money Moves

Some of the most interesting (and odd!) research about money comes from behavioral economists and psychologists. As noted in a recent Economist article, one study found that diners tend to spend more in a restaurant named “Cafe 97” than one named “Cafe 17.” Another study looked the behavior of people who carry a balance on their credit cards. In an experiment, some were given a statement in which no minimum required payment was specified, while others got statements with a clearly noted required minimum payment. Those who were not told how much was required tended to pay a higher amount.

The other way that minimum required payments work against you is that the required amount decreases slightly each month–that is, assuming you don’t charge any more on your card. And it decreases so slightly that you hardly even notice. If you pay this declining minimum each month, you’ll be in debt for approximately forever! One of the simplest steps you can take toward accelerating the payoff of your debts is to fix your payments on this month’s minimum. If your minimum required payment is $25 this month, keep paying that amount even when the card company asks you for $24.10 or $23.35.
p(matt). Here’s an example of how beneficial it can be to fix your payments. Let’s say you owe $1,800 on a card that charges an interest rate of 14 percent and that requires a minimum payment of 2.5 percent of the balance or $10, whichever is higher. If you pay the declining minimum required payment each month, it will take you 167 months to pay of the balance. By fixing your payment on this month’s minimum required payment of $45 (2.5 percent of $1,800), you’ll be out of debt in a mere 55 months.
p(matt). And here’s one other hint about avoiding debt. Stay away from restaurants with high numbers in their name.

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