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By: Yvonne Garand

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2015-11-23

Why You Are in Debt (And How to Get Out)

Credit and Debt | Saving and Budgeting

“Never spend your money before you have earned it.”

--Thomas Jefferson

If you’re struggling with debt, it may have less to do with the number on your paycheck than you think. Emotions play a large part in how you put your dollars to use and whether you are able to save for the future. By understanding the psychological underpinnings of your spending habits, you can begin to take charge of your emotions, change your behavior, and start using your money more wisely.

The emotional connection

Have you ever wondered why your friend is able to cover expenses easily and put away money each month on a salary of $40,000 while the guy that lives next door can’t cover basic monthly bills on the same income? Logic would suggest that your friend is better at managing money than his neighbor, but why?

In a research paper published by the Journal of Consumer Research, Rick Scott, Cynthia Cryder, and George Loewenstein indicate that an area of the brain, called the insula, is responsible for how much we spend. The insula is stimulated when you experience something physically or emotionally unpleasant. The more the insula is stimulated, by the price of a product or the idea of paying a large future debt, the less you are willing to spend. The less the insula is stimulated, the more you are likely to spend. It’s a simple equation and a good basis for our understanding of debt psychology, but it only tells part of the story.

Where people go wrong when it comes to money…

When emotions are triggered, the rationalizing brain comes to the rescue to design scenarios to help avoid pain. When it comes to money, there are some common tricks the mind plays, which result in more spending and greater debt. Here are a few of the big ones:

  • Things are tight now, but I’ll have the money later: credit cards, loans, and other debt vehicles make it easier for you to put off payment for your future self. You can’t really afford the expensive meal, skis, boots, etc. right now, but you’re certain that “future you” won’t have a problem paying them off, so you make the purchase and forget about it for now. Unfortunately, the bill is on the way and your future self is not happy to see the bill.
  • I’ll just put it on plastic: when you spend cash, you can see your money disappearing. According to the American Psychological Association, “people spend less when paying cash than using credit.” They spend less because cash is a transparent form of payment – you can see the amount of loss and feel greater pain when you lay down the bills. Paying with a credit card is not as transparent because all you experience is the swipe of a card, so it’s easier to make larger payments without feeling a loss.

  • If I don’t buy it now, I’ll lose out: if you’re a shoe lover and you see the perfect pair of shoes in the shop window, you might be tempted to buy them even if you can’t afford them. It’s not that you need a pair of shoes, but these shoes are one-of-a kind or they’re on sale for a short time only. In reality, they are not the last pair of fabulous shoes on the planet, though. There will be others. Making too many purchases because you believe you must, in order to get a great deal or a one-of-a-kind object can lead to a full closet and an empty bank account.
  • Just got to put out this one fire: there is an important difference between necessary expenses and urgent expenses. People with insufficient income are particularly prone to diverting their money toward urgent expenses, forgetting to save up for the necessities. Food, shelter, and transportation are necessary expenses for Vermonters. Lunch on the go is not a necessary expense; food is necessary but packing a lunch saves money for more expensive necessities.

Brian Knutson and Gregory R. Samanez-Larkin, in their research paper Brain, Decision, and Debt, note that “if emotion influences immediate choices, and does so repeatedly and consistently over time, it might have a significant cumulative impact on life financial outcomes such as debt.” Because debt is also associated with depression, and even marital problems, it makes sense to learn how to curb emotional financial choices and develop a more rational and reasoned approach to handling money.

The right way to think about debt

  • Mea Culpa: Before you can tackle any issue, you have to admit that it exists. When you acknowledge that your actions put you in debt, you can begin to see that your actions can also remove you from debt. As a result, you gain greater power over your financial future.
  • Let’s say we do this: It’s always easier to accomplish goals when you have a plan in place, and written plans often work better than those stored in the mind. Write down a list of actions you can take to pay down your debt. Your plan can include payment schedules, job opportunities (if you simply need to make more money), an appointment with a financial planner, etc.
  • I can do it!: if you step up to the microphone thinking you’re a bad public speaker, you’re bound to get tongue tied. The same is true with paying off bad debt. Keep your thoughts positive and set milestones to help you achieve your goals. When you achieve a goal, recognize your accomplishment and set a new one. With every achievement, you will feel more and more confident, which will give you energy to continue.
  • The difference between what I want and what I need…: Recognize the difference between what you need and what you want. You need food, shelter, and transportation. You don’t necessarily need gourmet meals out or a bathroom renovation. Spend money on what you need and save money for the things you want.

Changing your behavior is easier when you understand the psychology behind your actions. With the information in this article, you can begin to identify where your thoughts are undermining your financial stability. Once you have identified the issues, admit to them and begin using different thought processes that will support debt reduction.

Not sure how long it will take to pay down your debt? Try one of our personal finance calculators.

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About Yvonne Garand

Yvonne Garand is our guru for visionary strategy, branding, marketing, business and community development, customer experience, and people development.  

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