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The Frugal Creditnista

Understanding the Psychology Behind Your Debt

understanding the Psychology Behind Your Debt

Hey Hey, Prosperity Partners! 

Is your rising debt taking up space in your head? Did you know that your mindset about your debt could set the tone for how you handle your finances AND how you grow your debt?

Studies estimate that American households are carrying more than $17.29 trillion in various forms of debt, averaging $103K per household. But with the right mindset, you can not only crush your debt but also build good spending and borrowing habits to get comfy with your finances.

Lots of things shape our financial habits: emotions, personal beliefs, cultural backgrounds, our childhood upbringings, and our overall attitude toward money. All of these play a role in creating a money mindset, and you need to get specific about how you think about money. Doing so will help you build a better relationship with your finances and avoid debt like the plague (at least the unnecessary debt).

While income and necessary expenses play a role in debt accumulation, there are psychological factors that are worth exploring, too. 

Let’s dig in!

How Psychology Can Make Us Spend (or Not)

understanding the Psychology of Debt

Debt can make you stressed, especially if you can’t pay back what you borrowed all at once. Still, we find ways to tell ourselves, “It’s okay,” when we spend money we don’t have, sometimes on things we don’t need. 

In a nutshell, we choose debt for a few reasons:

Instant Gratification

We want it, and we want it now. So we make impulse buys without thinking long-term. This might be indulging in all-you-can-eat crab legs night, buying an expensive computer, or splurging on a brand new washer and dryer instead of waiting a few days for a repairman, for example.

Fear of Missing Out

FOMO is a powerful force. It makes us feel like we’re being left out, which can force us to open our wallets and make impulsive purchases. This fear comes from our need for social validation and inclusion. Social media feeds on this fear as we see others’ idealized (and sometimes fake) lifestyles in real-time.

Emotional Spending

“Retail therapy” can be a dangerous game; we try to fix our feelings by treating ourselves. We hope our new whatevers will make us feel better, but going into debt can do the opposite. It’s an endless cycle of pleasure-buying with no real reward.

Low Financial Literacy

A lack of knowledge about finances can lead us to make bad spending decisions. Many of us were simply not taught the skills we need to manage our finances and avoid debt, which can lead to impulse buys, poor budgeting, and falling victim to crafty marketing.

Emergency Situations

Sometimes, debt happens. You break an arm or your refrigerator bites the dust. However, if you are also in debt from making impulse buys, emergencies can make it harder to get out of debt because they’re unavoidable.

Buying stuff is addicting. We get a taste of dopamine (the reward chemical in the brain) and serotonin (the happiness chemical in the brain), both of which can trick us into ignoring the anxiety and stress that come with going into debt.

But this fake happiness can rob you of your financial stability and long-term goals.

READ ALSO: 6 Proven Steps to Start Reducing Your Debt in 2024

Strategies to Combat Debt Accumulation

understanding the Psychology of Debt

Debt can “snowball” on you if you’re not careful—the more debt you build, the bigger it becomes and the harder it is to get rid of.

Fighting the debt monster is a game of strategy. To win, you need the right mix of weapons. Let’s explore a few in detail. 

Know Your Spending Triggers

To avoid unnecessary debt, you need to get real about what makes you pull out your wallet. Are you buying things based on what you think will make you feel good?

Are you trying to maintain your social status? Do you get tricked by fake sale signs in department stores that make you feel like you’re getting a good deal?

These sneaky little spending triggers can add up over time and lead to debt you don’t need. Recognize these patterns and call them out by name.

Be honest with yourself about how you’re spending and what’s really driving that impulse. A moment’s thought could save you from months of repayments.

Create a Realistic Budget

Budgeting might be that pesky “B” word you’ve heard a million times but never bought stock in. But it can truly work wonders for keeping your finances in check. And honestly, it’s not hard or time-consuming to create a basic budget.

Start with your income—the amount of money you have coming in each month. Then, flesh out your must-have categories and bills, such as rent, groceries, cell phone, etc.

Anything left over can be budgeted for other things, like eating out, shopping, or entertainment. Set realistic spending limits for each category and stick to them like glue.

Refresh Your Thought Process

Once you understand your spending “whys”, you can start thinking about your purchases differently. For example, instead of trying to make yourself happy right this minute, think about how keeping your money will make you happier later. 

For example, ask yourself, “Will this item still bring me happiness in the next week or month?” If the answer is no, you might want to skip.

Another idea is to sleep on bigger purchases. Rather than seal the deal immediately, take the night to think about it. If you still want it the next day, you at least have a better reason to buy it.

READ ALSO: Understanding Charged-Off Debts: What They Are, How They Affect You, and How to Remove Them

Final Thought: Changing Behaviors to Improve Your Debt Picture

If you want to change your debt situation, you first need to change the behaviors that got you there. Understanding the psychology of debt—what makes you spend and how you end up in debt—can help you step out of your spending patterns and into a better process, and eventually, a debt-free life.

One of the most powerful secret weapons for reducing debt is to never go it alone. Having an objective third party weigh in on your situation can lead to insights and strategies you hadn't considered before.

Ready to Ditch Your Debt? Join me for my upcoming LIVE Workshop on February 10th, 2024 to learn valuable strategies to help you curb your debt for good!

understanding the Psychology of Debt

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