The Psychology of Debt: Part One

psychology of debt

Close your eyes and think about a time when you entered into debt. What was your thought process as you made the decision to take out that loan? While it is simple to say that you just needed to borrow the money, it is important to look deeper at your mindset when you entered into debt. How you think about money and debt can have a huge impact on your financial decisions down the road. By understand the mind and psychology behind debt, you can greatly improve your future decisions regarding debt management. When you are finished with this series of articles you will have gained insight on why people enter into debt, how you’re impressions of money impacts debt decisions, the need for instant gratification, and the psychological concept known as “conspicuous consumption.”

Why do we get into debt?

Debt opens up opportunities to make purchases you couldn’t have made otherwise. It’s only recently that credit cards and other forms of credit have risen to popularity. As you know, having debt is a doubled edged sword which can be amazing if utilized right, but absolutely horrific if used incorrectly.

You subconsciously believe you have more than you do

Credit cards give you the impression of having more money than you really do. If you have access to a card with a $1,000 limit it appears that you have $1,000 that you are allowed to spend. Mentally, you believe that I you actually have the money in your hands and freedom to purchase whatever you may like. You don’t really have to consider whether or not you can afford the purchase. Instead, your mindset shifts into thinking “I still have money left on my card, so I can make this purchase. I may not have the money right now but I can make payments and figure out all of that stuff later.” Don’t be a person who needs to “figure it out later.” If you need to figure out how you are going to afford something, you can’t afford it. Put your card back into your wallet and walk out of the store.

You begin to justify your purchase when you believe you have money to spend just because you have maxed out your card. One way of justifying a purchase was already mentioned, “figuring it out.” Other ways people justify purchases is by telling themselves that it is “just this one time. It won’t happen again.” The issue with this is that once you do it one time is so much easier to do it again. Look at drug addicts. How many started out by saying they were just going to take one hit? It can be a slippery slope if you fall into the “just this one time” trap.

Another justification is that you will make more money and that you can afford minimum payments until then. Maybe you are expecting a raise or maybe waiting on a big check from one of your clients. Whatever the case may be, you justify your large purchase because you will be “making more money soon.” Avoid this pitfall as well and remember, don’t spend money that you haven’t yet earned. You are putting the cart before the horse if you do otherwise.

Have you ever justified one of your credit card purchases only to regret it later? What was your justification?

Photo Credit/Flickr user digitalbob8

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