The Psychology of Debt

Jeremy BiberdorfBy: Jeremy Biberdorf

April 28, 2017April 28, 2017

The Psychology of Debt

As humans, we like to think of ourselves as masters of our own destiny, able to make the decisions, good or bad, that take us through life. If only it were that simple.

The truth is that we’re overwhelmingly slave to our unconscious processes. You might argue otherwise – and the jury will likely be out on the subject of freewill forever, but like it or not, your subconscious mind is being manipulated every single moment of every single day – and the goal? To make you spend money. The advertising industry in the UK alone is estimated to be worth in-excess of £100 billion to the country’s economy – that money does not come from just hoping customers like the look of the product you’re selling.

Any marketing, advertising or sales insider will tell you that there are numerous things that make a person more likely to spend their money – and all of these factors ensure the burden of debt is tucked away, out of mind.

Shrink the cost

You’re shopping for a new car and there is it – the dream machine that you want, need, deserve. The truth might be that you cannot afford the £20,000 price tag. So, disappointment sets in, until a friendly salesperson arrives and explains how that price breaks down into £350 per month over a period of months and years. Great! No more disappointment, your dream car for a smaller figure that sounds achievable each month.

Psychotherapists call what just happened a ‘reframing’ of the situation – and it’s actual something that fits into a broader group of behaviors, displayed by virtually everyone, called ‘defense mechanisms’. If the reality of the situation is perceived by your brain to be damaging in some form then the tendency is to look for an answer that removes that damaging or unpleasant element.

What is your brain saying?

Our self-esteem often relies heavily on the things we have to make us feel good, so that large unobtainable price ticket unconsciously tells us that our job isn’t good enough, we’re not good enough at saving, we’ve not been responsible enough, we could have tried harder… and a million other negative things. Although these internal criticisms are overwhelming not true, the fact remains that other people have those cars, bigger houses, nice clothes – or whatever else you desire, so comparing yourself to others gives those nagging doubts a way to enter your brain. As the thoughts pop-up it’s nice to be able to get rid of them as quickly as possible – and what better way to banish any self-doubt than with small monthly payments?

The internal battle

Have you ever experienced something that seemed like a great idea at the time but turned out to have painful consequences? If you’ve ever had hangover then this is a familiar feeling. This type of ‘hangover’ feeling doesn’t just happen after a big night of drinking – part of your brain deals with the ‘now’ – and part of it deals with the ‘later’ – and they’re often at odds with each other, meaning that ‘reframing’ of spending now can become a terrible idea further down the line.

This is when debt can become extremely psychologically damaging. You worked around all those nagging doubts in your mind and won! You got the product you knew you deserved – but now, you can’t afford the payment, so not only are you unable to afford the bigger price, you can’t afford the lowest possible price spread over months and years – yet everyone else is still driving around in their nice cars, living in big houses and going on luxury holidays.

Habitual comparing of yourself to others does not stop when you have the item you desire, often, it just causes you to keep looking for the next thing to aspire to – debt will hinder those aspirations, often bringing back the internal criticisms and making you feel worse – and widening the gap between what you want and what you can afford.

Although the problem of debt and reduced mental well-being reaches further than this one example, this pattern of behavior is extremely common – one that has been heard numerous times by specialist debt counselors the world over.

What’s the answer?

Andy Taylor is the Marketing Director at Creditfix – a UK company who work to find solutions for people experiencing problem debt. He explains how important it is for people to differentiate between ‘wants’ and ‘needs’ when it comes to managing their own finances: “What was once a must-have purchase can quickly become a financial problem that keeps you awake at night. We encourage people to try to envisage the long-term repercussions of debt – and not just the immediate feel good factor of a new purchase.

These sentiments are echoed by medical professionals – who see increasing numbers of people for whom debt has become too much to handle. While 1 in 4 people will experience a mental health problem in their lives, 1 in 2 people of those who suffer with mental health issues will be facing issues that relate to debt.

You mind is extremely powerful and impulses can be dangerous. It’s important to understand your motivations for getting into debt – and it’s even more important to consider those motivations against the stress of paying the price for years to come.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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