Wrapping Your Head Around Debt
Angelique is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So, you’re in debt. And, if you’re reading this, it’s probably because you’re working on getting out of debt. I applaud you for making this effort. Hopefully this will be the last time that you have to go through this kind of financial pain, but for many, that won’t be the case.
How many people have you known in your life that have paid off their debt and said, “Yay! I’ve paid it off, I’m never going to allow that to happen again,” but, then it does? For many of us it happens over and over again because we never get down to the root of why we allowed it to happen in the first place. Sure, for some, debt happens because of some sort of tragedy like a job loss, illness, divorce or death of a spouse, but for most of us, it’s just because we weren’t making wise choices. There are several theories surrounding this phenomenon. Do any of the following describe you?
Strained Relationship with Parental Units
Simon Y. Feuerman, Psy.D., L.C.S.W. explains in the Psychology Today Blog that our relationship with money, specifically debt, may have something to do with how nourished you felt as a child. That perhaps our relationship with our parents has some influence over our relationship with money. He says that, “loans for many people are quite easily confused with other things. The late psychoanalyst Hyman Spotnitz once observed that a loan is often processed by the unconscious as a gift.” And that perhaps if we had parents that gave, but left us with a feeling that we would have to somehow pay back the gift in some regard, that we might follow a similar pattern with our money because it feels familiar.
Other Reactions to Our Childhood Experience
In the American Psychological Association’s Monitor, Sadie F. Dingfelder reports, “Axioms we learn from our parents or society also influence how we spend, says Brad Klontz, PsyD, a private practitioner in Hawaii. One of his clients, for instance, burned through a fortune because he grew up poor and felt he didn't deserve his wealth. Another wealthy client from a poor background couldn't stop working 11-hour days, because his Depression-era parents taught him that no amount of money is enough to make you secure.”
My mother grew up in an extremely frugal household raised by a depression-era great-aunt and uncle that refused to spend money on anything beyond basic necessities. Her reaction to this in her adulthood was to compulsively over-shop. We had a TV and VCR in every room of the house (including each of our bedrooms), two Mercedes in the garage, a huge house and a “keep up with the Joneses” mentality. I won’t go into the unpleasant results for her, but she passed those poor financial lessons down to her children in various ways. Each of us has struggled with our finances throughout our lives for various reasons.
The Pain of Parting with Cash v. Credit
Deborah Fowles writes on About.com that “Studies show that most people are much less likely to buy, or less willing to spend as much, when paying with cash as opposed to credit cards.” The basic theory here is that you don’t feel the pain of parting with your money when you’re paying with a credit card. Some say this is even true of using a debit card. This is why a cash diet can work so well for so many people.
I’ve put myself on a cash diet and now I’m much more likely not to grab a cart when I pop into the grocery store, I just grab the couple of items I need and get out. I’ll also tend to order a regular coffee when I go to Starbucks (NASDAQ: SBUX) with co-workers rather than a latte that costs about three times as much.
Low Self-Esteem
Fowles also says, “To really get control of your spending and your credit card debt, you need to examine what money means to you. Make an effort to notice how you interact with money and what beliefs and attitudes you have about money. Studies also show that people with low self-esteem engage in more impulse spending and buying things they don't need.” Examine your past shopping sprees. Do you tend to shop when you’re feeling bad about yourself? Do you really need that Coach (NYSE: COH) handbag or new BMW, or does the label make you feel more important or somehow better about yourself?
External Locus of Control
Another theory suggests that people with an external locus of control are more likely to have problems with debt than people with an internal locus of control. On Hubpages, “toknowinfo” writes, “An often looked into aspect of a person’s psychology is what is called the locus of control. This is the individual’s own perception of control over the events that happen in their lives. People with an external locus of control tend to believe that fate, and luck, control more of their life circumstances…People with an external locus of control tend to feel more helpless.” Because these people tend to feel like life is out of their control, they kind of accept that financial problems are beyond their control as well and become resigned to always being in debt and therefore do little to try to control their spending or stick to a budget.
Money=Love
Dingerfield also reported that, “further complicating the issue are money's symbolic meanings, says Richard Trachtman, PhD, a clinical social worker in New York. For some, money equals love, and they lavish gifts on their spouse and children, whether they have the money to do it or not, he notes.”
Are you the kind of person who is constantly buying gifts for friends and family for no reason at all? Do you always pick up the check when out with friends – and not to show off – just because you really want to do something nice for them? Is your boyfriend or girlfriend establishing a collection of those pretty little blue Tiffany (NYSE: TIF) boxes?
Filling A Void
According to Dingerfield’s article, “Many people shop to fill a void in their lives, says April Benson, PhD, a private practitioner in New York. Someone who is dealing with a surly husband or ungrateful children may find that a friendly store clerk sings a siren's song.”
Caring for the Future You
Renowned behavioral economist, Daniel Pink, advocates using an online aging program to age a picture of yourself by 20 years or so and put it in a place where you will see it when you’re making financial decisions so that you will think about taking care of the “older you.” His theory is that most of us don’t really think too much about taking care of ourselves financially in the here and now, therefore, it’s easy to splurge. But, if you have to look at that picture of the older you and think about how you’re going to take care of that person, you’re likely to make wiser decisions.
This one is very interesting to me, I haven’t tried it yet, but I plan to. I tried aging a picture with a free iPhone app and it was really scary, I think I need a better program.
The “Right” Way to Pay Off Debt?
Suze Orman and Dave Ramsey have very different advice about how to pay off debt. Suze’s advice is to pay off the debts with the highest interest rates first, and Dave recommends paying off those with the lowest balances first.
The difference is financial v. psychological. What Suze advocates makes sense. You will pay less money out in the long run and you’ll pay off your debt faster. However, for those of us who need that feeling of accomplishment to keep us motivated, Dave’s approach may work better. Every time you pay off an account you’ll feel a sense of accomplishment that will help keep you on track.
What’s the right way…well, that depends on you.
Get a Grip
Money’s a tricky thing emotionally. There could be a combination of things that are keeping you in debt. If you can see yourself in any of the above categories, then most likely, you’ve got some issues that you might need to work through to keep you from repeating the cycle – and from passing it on to your kids. You might even want to get some counseling to help you uncover where your emotional relationship to your money exists and figure out how to develop and practice better habits.
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