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Is Debt All in Your Head?

The Royal College of Psychiatrists in the UK says that “one in two adults with debt has a mental health problem,” “One in four people with a mental health problem is also in debt,” and “One in four adults will have a mental health problem at some point in their life.”

So are we in debt because we are all crazy?  Well, kind of…  One of the major reason that we are in debt, or more importantly, have trouble getting out of debt is that our brains are wired to keep us doing the same things, year after year.  If we have a history of over spending or just plain financial irresponsibility, it is hard for us to change these behaviors.

Each year millions of people make getting out of debt their New Year’s resolution.  And they are included in the 88% of all New Year resolutions that fail.  There are definitely psychological reasons why getting out of debt is so difficult… let’s take a look at a few —

— New Year’s Resolutions activate our limited ability of self-restraint.

We all fall victim to overestimating our ability to control ourselves and just how much willpower we actually have.  We think that when the New Year rolls around we will have no problem cutting back on our spending.  Like an article in the Huffington Post points out “On January 1, it seems perfectly reasonable to think you will stop dining out three times a week in order to send extra money to your credit card. But this good intention will be derailed the first time a friend calls at 5:30 asking what you’re doing for dinner.”

Planning to change our ways is easy and seems possible, actually doing it is another story.

— Our brains ignore the future consequences of our actions.

One weird quirk in our brains is the ability to set aside the reality of the future when it comes to getting something we want, something we want right now.  A good example is knowing that you will have to work extra hours or cut back your spending on luxury items like gourmet coffee or eating out 3 times a week, in order to afford the payments on that new car.  But you care more about getting the car than you do about the pain of making the cuts to your budget in the future.

— Making purchase on credit just doesn’t feel real.

When we spend cash, it is painful; you can see the money going away right before your eyes.  Using a credit card doesn’t quite feel real. Granted, logically we are aware that we are spending the money when we buy that new iPad or Plasma or new clothes, but there is a well-documented divide in our brains that allows us to easily spend when we do it with a credit card.

So why is it so painful to spend cash as opposed to using a credit card?  There is actually a real phenomenon that experts call “coupling.” When we use cash to pay for something, we associate the purchase with consuming something, our cash resources. But when we use the trusted old plastic, coupling doesn’t occur. We make a purchase and then our card back, we don’t lose anything, and nothing gets consumed.  It doesn’t feel like we are out anything at all.

So what can we do?

Well, when it comes to credit card spending, the trick is to get the pain of spending back.  The easiest way is to stop using your credit cards and start paying for everything in cash. You will find that when you have to hand over your cash to make a purchase you will be more aware of just how much of your cash reserve is actually slipping through your fingers

To succeed in paying off debt is all about changing those deep-seated habits. It’s not enough to just say “I’m going to get my spending under control and pay off my debt.” You need to really look at yourself and decide what changes you can make if you ever want to see any of your resolutions come true.

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