One of the big debt reduction debates has always been math versus psychology. How much debt you have has more to do with human behavior and psychology than it does with mathematics. People are, for the most part, smart enough to realize the math behind debt. They know that if you charge more than you can pay off, you’ll be in debt.

The same is true for repaying that debt. There are two schools of thought when it comes to repaying debt. You can take the mathematical approach and pay off your highest interest rate debt first, thus reducing your total interest payment. This is commonly referred to as a debt avalanche, a reference to the other, Dave Ramsey method called a debt snowball. A debt snowball is where you pay the smallest debt amount first, then roll that payment into the next smallest debt amount. Your payment grows and grows, your debts are knocked off as quickly as possible, and this provides a psychological boost to help you finish. It’s clearly not optimal, no one disputes that, but it works off psychology and it has worked for a lot of people.

Here’s the key question – how much does the debt snowball cost you over the traditional method? As much debt as we may have, chances are no one goes through the effort of calculating it. We simply pick the one we think is best, either math (avalanche) or psychology (snowball), and we run with it.

What if there was a tool that did this? I found unbury.me, written by Jordan Santell (@jsantell), a calculator that calculates all that for you. If you enter in your debts, your payments, and how much you have to pay each month – it spits out the difference you’ll pay in interest. No more guessing, this is concrete data.

I put in some dummy data just to see how it worked. Two loans:

• $300 to pay each month
• $5000 – 6% interest – $50 minimum payment
• $6000 – 8% interest – $75 minimum payment

With the avalanche, I’d be debt free by December 2014 having paid $1343.92 in interest. With the snowball, I’d be debt free by December 2014 having paid $1519.60 in interest. Going with the snowball, and it’s psychological boosts, would cost me $175.68. Is it worth it? Maybe, but at least now I can decide knowing it was going to cost me $175.68, rather than “more.”

And the calculator is really pretty.

If you are at all interested in finances, chances are that you are aware of the current debate surrounding the debt ceiling, and the possibility of a default on U.S. sovereign debt obligations. Right now, there is a great deal of wrangling going on, accompanied by partisan grandstanding on all sides. But what does it mean? What is likely to happen if the U.S. defaults? And would it really matter to you?

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Last week, Reader Anthony sent me a most puzzling email and one that kind of hit home for me. He has a fairly common name, much like Jim Wang is pretty common, and he’s been getting debt collection calls for another Anthony who lives in the same geographic area, shares the same exact name (including middle initial), and has fallen behind on some debts. here’s a portion of his email:

This other person, also in N. CA, with middle initial S., apparently is 3 months late on his credit cards from Macy’s, Capital One, and this one NCB Management (Google says this firm is a collections agency).

I’ve been getting repeated collections calls from these companies instead of this other guy. How did my name end up associated with this person? My best guess is a mysterious call I received on May 5th, from an unknown number, when a woman asked to verify my name and the up-to-dateness of my information. All that she asked was “Hi, am I speaking to Anthony Smith?” and “is this your current phone number?”…? Well of course it is, I answered. Then I tried to ask if she can tell me who she’s calling on behalf of, and she just said “sir, I am not allowed to reveal that information”…

But starting from the next day, I started getting collections calls, perhaps once a week. Every time I explain (with less patience each time) to the rep on the phone that I am the wrong person, and they apologize and promise to remove my number from their list. Except they don’t, I’ve gotten contacted on three occasions by Macy’s, twice by NCB, and three times by Capital One.

Fair warning to your readers – if they ever get one of these calls, make sure to be very specific on what they verify…

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One of the best things you can do for your finances is to pay down your credit card debt. Credit cards are notorious for high interest rates and fees. Once you are trapped in the cycle of making credit card payments, it can be difficult to get out. And, worst of all, the interest that you pay on your credit card balances goes straight into someone else’s bank account. Interest, paid for the privilege of borrowing money, offers you no other benefit. It’s pure expense.

If you want to improve your finances, and move along the path to financial freedom faster, it is best to pay down your credit card debt as quickly as possible. Creating a debt pay down plan can seem a daunting task, but it doesn’t have to be. You can put together a credit card debt reduction plan in 55 seconds or less:

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I blogged a while ago about the “halo effect” and how being fiscally responsible can be a sort of “Get out of jail free” card for those rare occasion when you slip up. But what happens when it’s not you who has made the mistake?

I recently got entangled in a bit of an accounting snafu that quite frankly pretty much ruined my weekend. Here’s what happened:

On Saturday as I was heading out to the gym, I stopped by the mailbox to pick up my mail and found an envelope marked “Personal and Confidential.” In my experience, that’s usually a signal that the contents within are just some ad scheme–be it a credit card offer or time share scam or the dreaded “you’ve won a prize and must call xxx-xxx-xxxx immediately to claim it…” Upon opening the letter, however, I was confronted with a statement from a bill collector for an allegedly unpaid bill for a medical laboratory.

Yikes! Talk about a buzz kill…
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When the economy is prospering, debt isn’t an issue. You can pay your obligations of today because you know that you’ll be earning more tomorrow and lenders aren’t worried you’ll miss a payment. But as the economy sank last year, you saw a lot of credit card and loan companies scramble to assess the risk of their borrowers. If you had a credit card balance, you might have seen your interest rate go up. If you wanted to buy a house, you may have had to document your income a lot more stringently than you expected. It’s not surprising because the average household credit card debt, based on the Federal Reserve’s Survey of Consumer Finances in 2007, was $3,039.70.

At first glance that may seem a little low, but remember that a lot of people don’t even have access to credit cards. If you only include families with credit card debt, that value goes up to over $7,000. Ultimately, any amount over $0 is too much because credit card companies charge interest rates in the double digits. High yield savings accounts pay out less than 2% these days, so a double digit interest rate on credit cards is far too much. It’s time to pay them down, here’s how.

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For a lot of people, the term bankruptcy evokes the same emotions as the word cancer. To hear someone has gone through bankruptcy is like hearing they are getting chemotherapy for a malignant tumor or treatment for a life threatening disease. To others, bankruptcy sounds a lot like surrender and defeat. To wave the white flag to your creditors and admit you are a failure and cannot keep the promises you’ve made.

The reality is that bankruptcy is a business decision and should be seen as such. When people talk about Donald Trump going through bankruptcy, they don’t look at him as if he were a pariah. He’s a business man and bankruptcy is merely another tool in his toolkit. The Road Out of Debt, written by Joan Feeny and Theodore Connolly, is a book about getting out of debt with that perspective on bankruptcy. It’s not a book about bankruptcy, it’s a book about debt with a look at how not thinking about bankruptcy is a mistake.

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This morning I wrote about how Dave Ramsey’s Debt Snowball system works and why it’s an effective way for people to pay off their debts. It might not be the mathematically optimal way to pay off your debt but it’s worked for many people.

My look at the debt snowball was precipitated by an All Things Considered segment I heard on NPR. In it, Dan Ariely, behavioral economist, talks about a study in which he studied the loan payment techniques of over a thousand people. They gave each person five loans they had to pay off, a salary, and then had them start paying off the loans. The amount they received at the end of the study is proportion to how much you had in the study.

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