Your Brain Is Keeping You in Debt (And How to Fix It)

Dan Rafter — Mon, 21 Nov 2016 11:00:06 +0000

Your debt never seems to shrink. Each month you resolve to ditch your credit cards, spend less, and devote more money to paying down your outstanding debts. When next month rolls around? You're staring at even more debt.

What's the problem? Blame your brain.

Recent research from Scientific American suggests that our brains are wired so that when we do decide to pay off our debt, we tend to focus on our smallest ones first. But it'd make much more sense to pay off highest-interest debt first.

Your Brain on Debt

Scientific American, which published the results of its debt study in February of this year, started its research by concluding that the most effective way to battle debt is to pay off those debts that come with the highest interest rates first. Usually, that'd be the debt piling up on one of your credit cards.

The reason that this makes the most sense is that higher-interest-rate debt grows more quickly. If you pay that debt down first, your overall debt load will not rise as fast.

But instead of attacking higher-interest-rate debt first, consumers usually focus on paying down what they consider the most manageable of their debts, generally the smallest ones they face. They do this even if the interest rates attached to these smaller debts are lower.

How did Scientific American determine this? They performed an experiment in which participants were asked to pay multiple debts, all of which came with varying interest rates. Researchers gave these participants a paycheck at the beginning of each round of this game, asking them to use it to pay off their imaginary debts in whatever way they deemed best.

According to the study, only 3% of the participants — just five out of 162 — focused on paying down the debt with higher interest rates. Scientific American reported that the majority of participants paid off their smaller debts, instead.

This isn't just bad money management. It's psychological. Your brain does you no favors when you're battling multiple debts.

The Scientific American story says that people are naturally averse to debt accounts. This means that consumers with many different debts naturally want to reduce the total number of these accounts. This pull is so strong, it overwhelms the more rational approach of first paying down those debts that cost the most.

Teach Your Brain to Battle Debt

Can you fight your brain? Can you resist the natural temptation to close out those smaller debt accounts first? Sure, if you focus.

Consider the avalanche approach to debt repayment: Consumers pay off those debts with the highest interest rates first, making only the minimum monthly payments on the rest. Once they pay off the debt with the highest interest rate, they then move on to the debt with the second-highest rate. (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)

The benefit here is obvious: Debt with higher interest rates cost consumers more. Eliminating it first saves lots of money in the long run.

And if you want to outwit your brain's natural tendency to steer you in the wrong direction? You'll go with the avalanche method, too.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Common Logic Traps You May Be Falling For

Emily Guy Birken — Wed, 18 Mar 2015 11:00:08 +0000

The human brain is a funny thing. It's perfectly capable of learning new things, solving problems, and applying logic to complex situations. But the brain also makes shortcuts, incorrect estimations and guesses, and false connections between unrelated events.

What's frustrating to those of us who would like to live logically is the fact that we often tend to congratulate ourselves on our rational thinking — meanwhile, the brain is in the middle of making a logical mistake with lasting repercussions.

It can be very difficult to identify a logic trap while you are in the middle of one. But it is important to know the common ways that the human brain will let you down, so you are prepared when you find yourself succumbing to illogical thinking.

Here are five common logic traps that plague our thinking — and some suggestions for overcoming them.

1. Correlation Does Not Imply Causation

Correlation refers to a relationship between two things. For instance, sales of ice cream often correlate with high temperatures. As thermostats go up during the summer, so do sales of Ben & Jerry's.

Interestingly, the murder rate also goes up at the same time as ice cream sales. If you fall into the logic trap of believing that correlation means causation, then you might wonder if ice cream causes homicidal urges — rather than recognizing that both murder and ice cream sales might be tied to another cause, such as high temperatures increasing both irritability and cravings for sundaes.

Many conspiracy theories rest upon the logic trap of believing that correlation means causation. For instance, belief in the link between vaccines and autism (which has been definitively disproved) often rests on the fact that autism diagnosis rates have gone up along with vaccination rates. However, there are several non-causal possibilities for that correlation, including changes in how autism is diagnosed and improvements in health care options for children over time.

How to Fight This Trap

When seeing trends that are correlated in some way, ask yourself if there could be another factor that could influence both trends. Even if you are not able to identify what that specific influential factor is, just the exercise of thinking about additional influences can help you to remember that correlation does not imply causation.

2. Exclusive Alternatives Trap

When presented with two options, we have a tendency to immediately assume that they are mutually exclusive. For instance, the national dialogue on the issue of work/life balance starts with the exclusive alternative trap. We think of work and life as two separate spheres, rather than recognizing that all of our time is our life. But living and working does not have to be a zero-sum game, and thinking of it that way can be detrimental to living a life (which includes working a career) that you enjoy.

How to Fight This Trap

You may recall the bombshell from the summer of 2014 that Hello Kitty is not a cat. According to her creators, she is a little girl. As proof, the creators point out that Hello Kitty is never seen on all fours, and that she walks and sits like a biped.

This very odd detail about a beloved cartoon character can help you to remember that alternatives do not have to be exclusive. Americans see Hello Kitty and think "cat" because of her feline face, while Japanese see her and think "girl" because of her clothes and the fact that she walks upright. As a matter of fact, they are both right, because Hello Kitty is a fictional cartoon character that does not have to be one thing or another. Anytime you feel that there are only two mutually exclusive options, remember Hello Kitty and try to see if there is an option that allows for both alternatives.

3. Solve It by Redefining It

This particular trap is an excellent way to simply stop thinking about a problem rather than solve it. For instance, let's say you struggle with your finances. You could work hard on getting out of debt and avoiding spending temptations and investing — or you could decide that only superficial people care about money. If you go with the second option, you have "solved" your money struggles by defining yourself as the sort of person who is too moral to care about money.

But solving something by redefining it is a good way to kick a problem down the road, since your money struggles are not going to go away just because you have defined money concerns as superficial.

How to Fight This Trap

Check in with your definitions every once in a while. Robert E. Horn of The Lexington Institute points out this logic trap: "Definitions are never totally binding. Meanings erode over time. Words have temporary validity. Meanings — the relations of concepts to words — require periodic checks."

If you have decided that something is not a problem because of its definition — "friends with benefits" is a prime example — then it's a good idea to revisit the meaning of your definition occasionally to determine if it is still valid.

4. Forever Changeless Trap

Forever changeless is just what it sounds like. We have a tendency to believe that the way things are now is how they will be forever. You have fallen victim to the forever changeless trap anytime you have been surprised at how much a younger family member has grown since you saw her last.

The forever changeless trap is also one of the ways that many high-income earners can get themselves in financial trouble. They often assume that their great salary will continue forever, ignoring the possibility of layoff, disability, or other life changes.

How to Fight This Trap

It is almost impossible to recognize the forever changeless assumption when you are making it. For example, when my oldest child did not let me sleep for the first few months of his life, I believed that motherhood was going to mean perpetual exhaustion for years and years. If I had really examined that idea, I would have recognized that my son would eventually get the hang of sleeping. But I wasn't able to see that there was an end to that portion of parenting because I was in the thick of it.

Since it is so difficult to recognize the forever changeless trap while you are in it, the only way to fight this trap is to be open to changing your view of things when new information comes in, and use that information to create a more nuanced view of situations.

5. Process-Event Trap

When you fall into this trap, you look at something that is an ongoing process as if it were a single event. This trap is very common with any kind of self-improvement plan, such as budgeting. People will often create their budget in one fell swoop, and congratulate themselves on being done with it. Unfortunately, this ignores the fact that a budget needs to be a living document that you work on regularly. Otherwise, when your circumstances change (which they inevitably will), you will be financially unprepared.

Similarly, getting in shape and getting organized are also often viewed as one-time events, rather than processes. That means anytime you try to improve your life in one of these areas, you tend to fall back into old patterns after your big "event" of exercising/eating right for a month or cleaning the house in a mad frenzy.

How to Fight This Trap

Think of self-improvement as being similar to your laundry. You don't expect to only do your laundry once. You recognize that laundry is something you need to revisit on a daily or weekly basis — or else you eventually risk having to go naked. Similarly, self-improvement is not a once-and-done event. Like your laundry, you need to revisit it regularly and see it as an on-going process.

How do you steer clear of logic traps?

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

thought process

Your Brain Is Keeping You in Debt (And How to Fix It)

Your Brain on Debt

Teach Your Brain to Battle Debt

Lik this article? Pin it!

5 Common Logic Traps You May Be Falling For

1. Correlation Does Not Imply Causation

How to Fight This Trap

2. Exclusive Alternatives Trap

How to Fight This Trap

3. Solve It by Redefining It

How to Fight This Trap

4. Forever Changeless Trap

How to Fight This Trap

5. Process-Event Trap

How to Fight This Trap

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