This is another post in my series about busting debt, in partnership with Lending Club. I wrote about the 9 rules to follow to get out of debt recently.
I’ve been having a think lately about why we purchase things. And if *things* are usually the reason so many millions of us are stuck in debt.
Me? Yeah, I made some dumb purchases (a $2,000 camcorder in 2006 come to mind), but on the whole, my debt resulted more from my trading losses than my spending patterns. But I’m not the normal debtor.
Lots of people get into debt because of medical bills. That’s been well documented. I’ll stay away from that debt debate.
I’m fascinated by the individual that goes into debt to impress others.
I can relate to that person in some respect. The whole reason I was attracted to day trading was because I deep down, wanted to show others how ahead of the game I was. I was trading advanced options and currencies that 99.9% of people don’t even understand. It made me feel superior (of course, superiorly-stupid in retrospect).
Meet Johnny Debt
Why do people purchase a luxury item when they are in debt? I mean, lets say Johnny Debt is 5K in credit card debt. Johnny goes and buys a new flat panel LCD TV for $1800, though his current 32″ LCD works great.
I think Johhny’s purchase comes down short-term vs. long-term thinking.
Making that purchase, Johnny improves his *image* in the short term, right?
Long term, that purchase adds to his credit card debt, and assuming his past patterns continue, he’ll go further and further into debt.
Does Johnny think he’ll get a big promotion at work in the next few years? Does he just not even think about paying off the TV in the future?
I’m super curious about this type of behavior now. I think my thinking is so long term now, that it’s difficult for me to imagine this frame of mind.
So, debt isn’t attractive. But what we can finance with that debt is attractive, right? (To some people at least)
{ 10 comments… read them below or add one }
I think that people believe debt is normal. This attitude leads people to keep accumulating more debt. As long as they can afford the minimum payments they think that they are okay. But, what they don’t realize is that while they can pay the minimum payment they cannot pay off the actual principle.
First thing, as TheDebtHawk said, many people view their expenses based on their minimum payments rather than the actual cost. This gives them the view that they can afford more than they actually can.
Also, I think enthusiasm may have a role to play for some people, particularly those spending to impress people. They may think they will be getting a better job soon, a raise, any number of things so are more inclined to spend the money already even though they don’t have it.
It’s called keeping up with the Joneses…when the Joneses are deep in debt too. Adults trying to impress people they know and don’t know. As Dave Ramsey puts it, we’re in love with payments.
Do you guys think age has anything to do with spending? I know younger adults have trouble recognizing the long-term effects of their current actions…
For those like me who are in credit card debt (employed, do not have medical bills or children) I think the over-spending is 100% psychological. In fact, if you know of a great boot camp to figure this psychological block out please let me know.
In the example of the TV here are some things I imagine the Johnny’s of the world would say to justify the purchase:
-I might as well buy a nice TV now, there is never going to be a good time to buy it anyways and I will have it for years to come.
-It’s a piece that you have for years unlike shoes or a purse that will go out of style.
-I can finance it at 0% on a best buy card!
-I deserve this TV, I work hard and I want to treat myself.
-My current TV is embarassingly small, I’m an adult now so it’s time to move up in the world.
Thoughts? Notice the thought of how you were going to pay it off never crossed the buyers mind. I’ve definitely gotten into credit card debt by using the justification thought process above…
I think people end up in debt because most of us use credit cards to pay for stuff, and we are encouraged to use them, our credit rating is measured through our use of credit cards. the danger of the credit card that it delays the so called “pain of payment” (in our brain the same area is activated when we are paying for something as when we are experiencing pain!) So credit cards promote and support impulsive buying … and debt is the delayed consequence of it… sadly
I think that people believe debit is normal. This attitude leads people to keep accumulating more debt. As long as they can afford the minimum payments they think that they are okay. But, what they don’t realize is that while they can pay the minimum payment they cannot pay off the actual principle.
Great article — love “Johnny Debt.” This is very relevant to me, as I try to steer my kids away from the credit card habit. There are tons of pressures from peers and advertizing for young people, who are not sophisticated consumers.
I tell them that credit cards are a very expensive form of money — when they put it on a credit card, they might as well add 30% to the price that they think they are paying. (Actually that can far exceed 30%.) Of course, having a lot of credit is good, but having a lot of debt is bad — a distinction that most people cannot make.
This is also reinforced by college debt. But I think I would have quit school, if it wasn’t for the fact that I had college debt, so I did not want to pay that with nothing to show for it.
People always feel “buyer’s remorse” too. I think that paying cash mitigates that feeling.
I think for me, it was (emphasis on was) more of a we’re screwed anyways, idea. Why would I sacrifice my kids christmas because of my inabilities to gain enough money? Or my wife’s new business? It was also to help make me feel like a better father. Taking my daughter out to eat was a treat, made her happy, made me feel like I was a good father. I was and still am struggling with depression. Food made me happy, screw the debt, I need to be happy today.
Now that I have some peace and a great plan to get out of debt (plus a raise at work- cha ching) I spend less and recognize where depression was running me.
for me it was a combination of being uneducated in personal finance and lusting/wanting things. all my debt was incurred in my years in college & an year afterwards. after I started reading finance books, articles and blogs, I learned so much. I’m still paying for my mistakes but haven’t charged a thing in years. & the knowing that I now know way more than I did before feels empowering.