Debt 
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Banking, Credit Card Debt & The Paradox of Choice

The paradox of choice is that the more options we are given for a particular choice, the less likely we are able to make a choice. Penelope Trunk discussed it in her article about taking a job, any job and references Dan Ariely, an MIT behavioral economist, and his book Predictably Irrational. In the book, Ariely discusses a study about how people ended up buying more jam when given six potential samples versus twenty four. Twenty four potential samples was simply too much and people ended up not deciding, even though they had more information.

How does this apply to banks and credit cards? Too much information paralyzes us. It paralyzes me. In the case of jams, there’s no pain in not buying a particular flavor. In the case of credit card debt, there’s a significant pain in not paying down a card. With a bank, there’s a bit of pain in interest not earned and a bit more if you overdraft because you forgot which account held how much (or you forget how much you need to keep in an account to avoid fees because you have too many accounts). Too much information, like juggling many balls, hampers our ability to make good decisions and causes us unnecessary pain.

The solution is the simplify your finances.

If you have credit card debt, pay down the smallest amounts first. This may sound similar to Dave Ramsey’s Snowball technique and that’s because it is. However, rather than focusing on the psychological benefits (yay! another debt conquered! let’s get the next one!), I argue that removing one headache from your life, even if it’s not the most financially distracting one, is beneficial. Next, try to consolidate bigger debts into as few accounts as possible without sacrificing the interest rate. By not sacrificing the interest rate, I mean don’t consolidate lower interest cards to higher interest cards (which sounds obvious but sometimes we make mistakes). The number of credit cards offer zero fee 0% balance transfers are dwindling but they often have a fee transfer cap that could be to your benefit.

With banks, don’t keep accounts you no longer need. I kept an old employer’s credit union account open for a year and a half and it cost me $20. I had transferred money into that account from my Emigrant Direct account and written a check. The check didn’t get cashed for several weeks and before it could be cashed, I went into my account and saw some money sitting around. Not remembering why the funds were there earning a low interest rate, I transferred them back and got dinged with an NSF. While I was able to get the NSF removed, it was entirely my mistake but caused by keeping an account I didn’t need or use anymore. There are no negative credit impacts of closing bank accounts, so close the ones you don’t need anymore and drop juggling that ball.

Simplify your life and reduce the number of things your brain has to manage, you’ll be happier and richer for it.

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On a happier note, my post on the Top 5 Online Banks made it into this week’s Carnival of Personal Finance hosted by Canadian Dream.


 Debt 
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Personal Finance Psychology

“I usually keep my card wrapped in a picture of my children to remind me of why I shouldn’t spend … ”
                                             – Trent of The Simple Dollar

If you think money is about dollar and cents and things you can hold in your house or your hand, you’re wrong. Personal finance may seem like it’s all about the numbers, where you have to spend less than you earn, where you have to save up an emergency fund, where you have to invest in the stock market and get your 10% return; but the truth of the matter is that personal finance is more about psychology than it is about mathematics. Everyone knows that you have to spend less than you earn, no one is so disconnected or so poorly educated that they don’t realize how basic math works. It’s like physical fitness, we all know what we’re supposed to do, we just have difficulty remember to do it.

Trent made the above quoted statement in response to my post about how you should write your goals on your credit cards. My tip was a simple reminder, his was a simple reminder packed with the power of psychology. You can easily write the goal on your credit card and then dismiss it when you need to spend. Dismissing a picture of your children, the reason you live, breathe, and work every single day… dismissing that would take a Herculean effort. But it works. Trent knows he shouldn’t splurge on food or kitchen tools or video games, JD knows he shouldn’t splurge on comic books, and I know I shouldn’t splurge on vacations. Slap a picture on it, of either your kids or your cats, and it drives that point home like a jackhammer.

If you think Dave Ramsey Is Bad At Math, you’re not alone. You’re also right. Dave Ramsey’s Snowball debt busting methodology is mathematically suboptimal. For those unfamiliar with it, you essentially pay off your smaller debt amounts first, then roll those payments into larger and larger debts. The payments “snowball” and you are also rewarded with positive feelings about knocking out the smaller debts. It’s suboptimal because you would save more money by paying off the highest interest rate debts first, but you lose the psychological benefit of kicking one of those debts in the butt. While suboptimal mathematically, for many it is the optimal solution because it helps them overcome their debt. It may not be smart math, but it’s smart psychology.

The next time you have difficulty with something personal finance, be it spending less than you earn or saving towards something, try some psychological tricks and you may find that it works out better in the long run.


 Personal Finance 
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PFBlogger Spotlight: Mrs. Micah, Finance for a Freelance Life

After a long long break, I’m bringing back the PFBlogger Spotlight series with an interview with Mrs. Micah of Mrs. Micah: Finance for a Freelance Life. Mrs. Micah is one of the younger personal finance bloggers out there (writing that just made me realize I’m on the backside of my 20s!), 22 and a recent college graduate and follows her personal finance life. It’s very much in the same way I started blogging, I was 23, a recent college graduate, and I too “discovered the personal finance blogging community who have been very supportive.” (though three years ago the community was much smaller than it is now) Anyway, via email I had a chance to ask her a few questions and she happy to oblige.

jim: Hi Mrs. Micah, could you tell us a little about yourself?
Mrs. Micah: Let’s see. I graduated last May (07) with a BA in English. Everyone says not to major in English, but I found it a very rewarding experience. It helped polish my writing and the major was so comparatively light that I was able to take a lot of other classes and get a well-rounded experience. I even took a personal finance class!

In my free time, I like to read and sew. I particularly like making quilts, whether for myself, for friends, or for charitable groups. I finally gave in to peer pressure and have started reading the Harry Potter series. Lots of fun and it’s great not to have to wait until the next one comes out.
jim: What motivated you to begin blogging and how long have you been doing it?
Mrs. Micah: I’ve had this blog for about 5 months now. Blogging itself—well, I’ve been doing that off an on for the last 6 years or more. I love to write and engage in conversations with others, which is what first attracted me to blogging itself. This is the first time I’ve blogged on something other than “life.”

I discovered personal finance blogging just after my honeymoon, when I was coming face to face with the realities of life on our own and with our debt load. While my husband’s loans are deferred because he’s still in school, that $100k+ will be coming due in the future. I began reading blogs and soon started blogging myself. It was a way to keep myself accountable and to converse with others in similar spots. Tricia at Blogging Away Debt was my initial inspiration.

The timing explains the “Mrs. Micah.” I was just married and quite twitterpated.
jim: When you got married, how did you two handle your finances?
Mrs. Micah: For the wedding? Our parents paid for it and I worked (with a lot of help from my mom and mom-in-law) to make it beautiful and frugal. I made the dress (no biggie, actually, I’m a seamstress), we had a lunch reception and no limo or videographer. I picked the most inexpensive but beautiful lilies I could for the boutonnières and carried Queen Anne’s Lace and Baby’s Breath in my bouquet. Micah provided emotional support when I’d become overwhelmed in planning.

If you mean right after we got married: I asked Micah if he was ok with me figuring out budgets, shopping lists, debt repayment, etc. I was just getting into personal finance blogging and had taken a personal finance class my last semester in college. We discuss spending trends and any big-ticket purchases to make sure we’re on track. And I tell him a lot of things I’m doing—I try to teach him the new things I’m learning. He says he likes to listen because I get so excited about it.
jim: What makes your particular perspective unique?
Mrs. Micah: Probably my age. I don’t know if I’m the youngest PF blogger out there, but I’m certainly one of them. I’ve also been told that my writing is very upbeat and optimistic.
jim: How about your favorite personal finance book?
Mrs. Micah: I think Dave Ramsey’s Total Money Makeover made the biggest impression on me. I’m not a Ramseyite, but I think he does a nice job of setting out the basics. I like his idea of attacking debt, though I disagree with the order of his snowball (I’m a math-type and like the idea of highest interest first).

Jean Chatzky’s You Don’t Have to Be Rich was very encouraging, too. I don’t think we’ll ever be pulling in 6-figure incomes (which is ok), but it’s nice to know that the money management principles were doing really do have a payoff.

And the Shopaholic series by Sophie Kinsella makes me feel better about my debt. At least it’s “honest” debt gotten for an education, not for a new pair of shoes. The books also squash my any shopping desires I have. (Though sometimes I wish I could wear the debt, but I tell myself that its benefits will come in long-term financial rewards. Plus, I know Micah’s meant to be a professor.)
jim: Which of your posts do you think all your readers shouldn’t miss?
Mrs. Micah: Preparing Financially for a Career Change, Part 1, Preparing Financially for a Career Change, Part 2, Overcoming Impostor Syndrome for Financial Success, Best PF practices of the year! (and they should contribute if they’ve got ideas!), [and finally], not personal finance, but I think this one is very important: Another PSA: Newborn Hearing Screening.
jim: What’s the biggest financial “mistake” you’ve ever made? (or regret you have)
Mrs. Micah: My biggest regret is not take my finances as seriously earlier. I’ve always been a pretty cautious spender, but I’m sure I could have done better.
jim: What do you mean by “not taking your finances seriously?” What would you have done differently if you could go back in time and warn yourself?
Mrs. Micah: I’d like to tell myself when I was first working (14) that there was no rush to spend. Suddenly having a paycheck meant I could finally afford DVDs or books, but I bought a lot of little things I at first that I didn’t use.

In my teen years, I did an excellent job saving up for a violin and a trip to Europe. I think in the former case, I would have reminded myself that I didn’t need to buy the most expensive violin I could afford (though my violin has a lovely sound!) and maybe spent a bit more time shopping around. I don’t think I have any regrets about the trip to Europe.
jim: What’s the best financial decision you’ve ever made?
Mrs. Micah: Paying off our credit card all at once. When I married Micah, he had a credit card debt of just under $1000 at 29.9% interest. I decided to use my savings to wipe that out.
jim: What is your favorite personal finance blog and why?
Mrs. Micah: Oh dear. That’s like asking me my favorite book. Probably Paid Twice. She’s got a very engaging, story-like style so you feel you’re going right along with her life. I read and comment there so much I feel like a fan girl.
jim: What do you hope to accomplish in the next year?
Mrs. Micah: I hope to bring my earnings from my jobs and my freelancing up to $2500/month after taxes by the end of the year. That will give us $500 or more (of my income alone) to throw at debt or put into savings. And we can use all of Micah’s for it. That would be very exciting.

I also hope to grow my blog and start reaching an even younger audience (college-aged).

And I have a semi-secret project I’m working on, we’ll see how that goes.
jim: If your blog ended today, how would you like people to remember it?
Mrs. Micah: I’d want people to remember the spirit of optimism and possibility.
jim: To what do you attribute your upbeat personality and optimism?
Mrs. Micah: Counterintuitively, I think part of it comes from my depression. Before the depression, I always had a lot of energy and was naturally, well, talkative is a nice way of putting it. In writing, I’m trying to reclaim some that energy, to encourage myself even as I encourage others. There are days when I feel like I can’t take it anymore, and sitting down, figuring out how to take some control over my life, and writing positively about it is very therapeutic. Personal finance is a great way to start feeling some control.
jim: Lastly, what’s something no one else in the blogging world knows about you?
Mrs. Micah: I sleep with a teddy bear named Dashell. If he’s not there, I have a really hard time falling asleep….
jim: Thanks so much for taking the time to answer all my questions, I hope you and Dashell and Mr. Micah have a great weekend :)
Mrs. Micah: Thanks, Jim, I’m sure we will. :)

Go check out Finance for a Freelance Life… right now!


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