Manage Your Debt - Let's Explore Your Options


More is more later

Do more with more.

Perhaps better said is do more when you get more.

With the economy improving and, we all hope, the worst days behind us, some of us can begin looking forward to regular raises in income again. If you fall into that category, and most of you will eventually, you can make decisions about your additional income now that will pay you dividends in the short term and major benefits in the long run.

Shlomo Benartzi, professor and behavioral finance expert at UCLA’s Anderson School of Management, is most notable for the simple idea where he demonstrates that people are averse to making financial decisions that are wise in every way, but result in less spending. We hate that, because it feels like we are depriving ourselves.

As an example, Benartzi refers in a TED talk presentation to an experiment in which a researcher gives a monkey a banana. The monkey is grateful for it. To another monkey he gives two bananas, then takes one away. That monkey still has a banana, but is upset about its loss.

People who have run into problems because they spent more than they make eventually have no choice but to spend less. But once you establish a spending plan you can live with and begin dealing with debt, then it’s time to plan for what happens when your income increases.

Benartzi suggests that if you get a raise, go ahead and keep part of it, but set aside another part of it toward savings. He doesn’t mention it, but dedicating more to killing off debt is a fantastic use of new money, too.

The best way to do this is to have the money taken out of your paycheck automatically. Sure, that means filling out annoying paperwork, but at least when pay day comes around some of your money will be deposited into savings, a 401(k) account, or into an account dedicated to paying off bills. However it’s done, you won’t feel the same loss you would if you cut your spending by the same amount now. You will barely notice, if at all.

The first time you save, or spend more retiring debts, your progress might be slow. But if you do it each time you get a raise you will, before long, see a rapid reduction in debt and save a significant part of your income even while you enjoy your raises.

Once you pay off all your debts, you could consider allowing yourself to keep a small part of what you have been spending on debts. But, if instead, you dedicate that money to saving for the short term or for retirement, you will hardly notice, because it won’t be a reduction in pay.

The “save for tomorrow tomorrow” strategy, as Benartzi puts it, is a painless way for you to create the financial security you want. For more ideas about short-term and long-term strategies for eliminating your debt and creating financial security, talk to an American Financial Solutions credit counselor to get started soon.

Published Feb 19, 2014.