As we look ahead to the new year, you may be saying to yourself "This will be the year I finally dig myself out of debt." And right now, you have every intention of following through.
But there's a reason why 88 percent of all New Year's resolutions fail. It's extremely difficult to change the behaviors that got you into debt. In fact, according to psychologists, our brains are wired to keep us doing the same thing, year in and year out. Here are three of the psychological reasons why getting out of debt is so difficult -- and what you can do to combat your wiring:
1. New Year's Resolutions trigger our restraint bias. We all tend overestimate our own willpower and self-control. We believe that we will be able to show much more restraint in the future than is realistic. On January 1, it seems perfectly reasonable to think you will stop dining out three times a week in order to send extra money to your credit card. But this good intention will be derailed the first time a friend calls at 5:30 asking what you're doing for dinner. Planning to be virtuous is easy and it feels achievable. Actually avoiding temptations is much more difficult.
To solve the restraint bias problem, you need to be realistic about your reaction to temptations and be proactive in planning ahead for them. It's not enough to say "I'm going to quit dropping $40 on dinner three times a week." You need to know why you have made a habit of dining out and specifically plan what you can do to resist those temptations. For example, you may be dining out so often because you don't know what to do about dinner until you're already starving. That means finding ways you can enjoy planning, cooking and eating dinners at home.
2. Our brains discount future consequences. A related problem to restraint bias is a funny quirk in our brains called Hyperbolic Discounting. This effect means that we don't consider future consequences for ourselves when we want the instant gratification. For instance, you might know that you will have to work overtime every month for the next five years just to be able to afford the payments on your brand new Mini Cooper, but you care more about getting the car now than you do about how painful budgeting will be then.
Hyperbolic Discounting is part of the reason why many people go overboard with shopping or eating in the weeks before New Year's. They figure that getting out of debt or losing weight is a problem for their 2013 self, which feels almost like a different person.
To combat the effect of Hyperbolic Discounting, take the decision-making out of your own hands. For instance, the age-old advice of freezing your credit card in ice is actually quite effective. Waiting for your card to thaw gives you the opportunity to think about how your purchase will affect your future self. Similarly, setting up automatic payments to your credit card on payday will ensure that you are doing what your future self will want, rather than spending the money the way your now self might crave.
3. Credit card spending doesn't feel real. There is a pain associated with spending cash which we do not feel when we pay with plastic. This effect, which psychologists call coupling, explains how the experience of consuming something is tied to purchasing it. When we pay with cash, we feel the pain of losing the money immediately, but paying with a credit card delays the sense of pain. That means the cost of your purchase feels less real to you than it would if you paid with cash.
And because we pay our credit card bills electronically, there is a further sense of unreality to the amount of money you owe. The further you get away from cash transactions, whether that is in the initial point of purchase or in the bill paying, the less likely you are to feel the pain and urgency of your debt.
You can fight this disconnect by paying for things with cash, which will give you a better sense of what money is really worth. That sense will help you change your spending habits and your understanding of what you owe -- which will help you to develop the discipline necessary to pay off your debt.
Succeeding in paying off debt is all about changing ingrained habits. It's not enough to announce your intention of ending the cycle of debt. You need to really look at yourself and decide what changes you can make to see your resolutions come true.
Jeff Rose is a Certified Financial Planner and writes about financial planning topics at Good Financial Cents. His latest project, The Debt Movement, is to help people pay off $10,000,000 of debt in 90 days. You can join the movement and a chance to earn some of the $10,000 debt scholarship money by visiting DebtMovement.com.