Need Financial Help? Consult Your Psychologist

Recently at work, I had a conversation with an upset customer concerning the changes made to his credit card account.   Currently, the customer’s card is separated two accounts, one that charges a 21% interest rate and another that is interest free as long as he makes his monthly $40 payment.  What the customer wanted to do was completely pay off his non-interest bearing account.

Normally, this would not have been a problem, and the customer’s request would have been easily fulfilled.  However, thanks to the 2009 Credit Act that went into effect on February 22nd, it is now illegal for my company to allow him to do so. This act is designed to protect consumers from unsavory credit card company policies that would apply payments to the accounts with the lowest interest, resulting in more profit for them and more financing charges for the consumer.

Getting back to my story, you may be wondering why someone would want to pay off the account that charged no interest first.   In this particular case, the customer explained that he just wanted to have one account, wanted a “de-cluttered and less confusing statement”, and just wanted to be rid off the extra account.   Although I tried to explain the new law and why he would be better off applying the extra payment to his account that was enduring 21% interest, he left frustrated and unhappy.

Now, I do not think that this customer was just crazy or naive of financial matters. In fact, he is actually a  successful account executive for a Fortune 500 company.  Instead, I think he was just making his decision based on a idea stuck in his head rather than a financial reason.   This situation made me wonder if I make some of my own financial decisions the same way.   Unfortunately for me, after doing some analysis I found that I am guilty of doing the exact same thing.  The following are some the the things that I do with my money that really make no financial sense.

1. Insisting on keeping a set amount in my checking account at all times. I am not sure how I came up with this arbitrary amount other than it is a nice round number.  This amount covers my monthly expenses about 5 times over.  There is absolutely no logical reason why I never let my balance fall below this amount.  If I were thinking with my financial side of my brain, I would  cut the amount in half and put the rest in my ING account and earn some extra interest.  Even though I know this is the right thing to do,  I can’t seem to overcome my mental block.

2. Overpaying my taxes all year so that I get a nice refund. Surely, this is a very common practice.  Millions of Americans use this method because they think they would just spend the extra money in each paycheck and use the tax refund for a major purchase or vacation.   But of course, this makes no financial sense.  Basically you are allowing the government to make interest on your money all year just because you don’t think you have the discipline to save it yourself.

3. Ignoring my long term debt. I do this with my student loan.   I could easily pay it off completely, but just do not want to see the money leave my checking account (see #1).  So instead, I incur the 3% interest rate and waste $350 a year on interest.  There is a part of the brain that just keeps on telling me that this type of long term debt does not count and that I should just continue making my payments and settle it in 16 years.  Many people do this with their mortgage.  Paying extra on your mortgage can help pay it off years in advance.  Still, this usually proves to be much easier said than done.

4. Taking part in the Sunshine Club. What is the Sunshine Club you ask?  The Sunshine Club is my work place’s weekly lottery program.   Each member puts in $5 a week and we take turns buying the tickets, dreaming of winning millions.   Even though it is fun thinking that we have a chance to win and quit our jobs, the odds are unbelievably against us winning the jackpot.  Still, we throw away over $250 a year in pursuit of this improbable dream.

Although I do consider myself to be knowledgeable about personal finance (after all I occasionally even write about it), it is alarming that I still do the above things that are not financially logical.  I guess to seek some professional help.

So move over Dave Ramsey and Suzie Orman, I will be turning to Dr. Phil from now on for all my financial advice

This post was recently featured in the 246th Carnival of Personal Finance at Taking Charge
a CreditCards.com  blog.