How to Trick your Brain into Paying Off your Debt

Some decades ago, accessing personal credit was not an easy task. So when you had no money, there was no temptation to resist. To buy what you wanted, you simply had to wait for your next paycheck or make money in other ways.

Today, we live in a different world. Credit cards, Buy Now Pay Later (BNPL) schemes and other forms of easy financing let you satisfy that buying impulse, that need for instant gratification, even with an empty wallet.

A "little treat" after another, one credit card here and a couple of delayed payments there and you could rack up up to $20,500 in debt, which is the average Australian household debt (we call this red debt, the type of debt that diminishes your wealth over time, such as high-interest credit cards and personal loans).

But that’s not your fault.

We live in a culture where a good life is determined by the products we use and the experiences we can afford (strangely enough, marketing people tend to omit that the best things in life are free… except pizza of course, but it won’t break the bank).

Most of us seem to be convinced that our value is intrinsically linked to our personal wealth and that a good dose of retail therapy fixes everything.

Then if we add to the mix social media, the comparison game and lifestyle inflation, we end up with the perfect storm for accumulating debt.

We believe that we deserve all the shiny things we see around more than we deserve to be debt-free.

Of course, this is not the only scenario. There are also people who get into debt following an illness, an accident, a divorce or other unforeseen circumstances. With no emergency stash and support network, personal credit becomes the only option available to them.

Regardless of how you accumulated it, debt can be very damaging to your health. 

Several studies found that severe debt is associated with worse mental and physical health, including a higher rate of depression.

Most people in debt are overwhelmed by a great sense of guilt, which debilitates them and affects their ability to see clearly and find a solution to their problem.

They also find it difficult to ask for help because, like most of us, they don’t like to talk about their problems, especially when they are money related.

What might surprise you is that paying off your debt is about motivation, stamina and other psychological traits, not money skills. 

Paying Off Debt is About Psychology, Not Numbers

Most of us are not as rational as we’d like to think. That’s why our psyche holds most of the answers to how and why we get in and out of debt.  

If you ask an actuary or accountant what the best way to get rid of debt is, they will tell you to look at all your debts and start paying off the one with the highest interest rate. When you’re done with that one, you can then move on to the one with the next highest rate, and so on, until they are all gone. This process minimises the amount of interest you pay, so you will settle off your debts faster.

This process seems sound in theory, but it only works for the very disciplined among us, the ones who have enough drive to keep going until the job is done. 

However, for most people, it doesn’t work. That’s because most of us need to experience a sense of growth and achievement to find the necessary motivation to keep progressing and completing a task. 

What should you do instead?

The method that gets the best results in practice is to start repaying the smallest debt first. 

Then you can tackle the other debts from smallest to largest until you are finished. This means you get a quick win at first. Then, as you move to the larger debts, there is more free cash available to attack them, helping you to build and maintain momentum.

This type of achievement triggers the release of a brain chemical called dopamine. Dopamine is responsible for the warm fuzzy feeling you get when you accomplish something and can be highly addictive. That’s why to-do lists work so well. It’s been proven time and time again that we are better at achieving goals if they are broken down into a series of smaller ones. 

Now you know why the best way to pay off debt is not the most financially efficient but the most psychologically effective.

How to Trick Your Brain into Paying off Your Debt

Here are five key tips to help you turn your brain from opponent to teammate and get you out of debt:

1. Focus on the end state

If you are experiencing guilt and shame in relation to your debt, the first thing to do is to forgive yourself. Debt is not intrinsically evil. Plus, whatever mistakes or decisions you made, they are part of the past. Feeling guilty keeps you tied to the very past you’re trying to separate yourself from.

To help with that, focus on a future where you are debt-free and proud of your achievement. The positive emotions associated with this mental image will help you get clarity and reinforce your motivation.

2. Use dopamine to your advantage

As we have seen before, dopamine is a powerful trigger and you can use it to your advantage. Make a list of all your debts, noting the name of the lender, the amount you owe, the interest rate and the minimum monthly payment. 

After you have made the minimum payment on all your debts each month, use the rest of the budget to pay down one debt. Don’t spread it over many debts. 

When that debt is gone, celebrate the win, then move on to the next one. This means that you knock off the debts one by one and get a sense of achievement as the list of your debts gets shorter.

3. Reward yourself

Once you’ve paid off one of your debts, reward yourself with a free or low-cost activity or celebrate the win with a friend. This will not only cement the constructive habit and your commitment, but will avoid frugal fatigue, which can lie dormant and erupt in overspending during periods of stress.

As you can see, getting out of debt doesn't mean you need to stop living!

4. Avoid temptations

The siren call of marketing people can be very tempting. They make things so easy for you, it’s hard to say no. So the best strategy is to make things harder for… yourself! 

Cancel your BNPL accounts, unless you owe money on them, in which case, follow the tips in this article to stop using them and avoid making things worse.

Whenever you can, pay with cash. Behavioural economists have found that the pain of paying, which everyone experiences at checkout, reduces when using a credit card. Take your credit cards out of your wallet and put them somewhere you can’t easily reach. 

There’s another very effective trick against online shopping temptations. Next time you feel the urge to buy an item, place it in your cart and leave it there until the next day. 

The time and effort required for you to jump through these hoops give you the chance to reflect and realise that, often, the item you think you need is meaningless when compared to the feeling of being debt-free.

5. Keep your goal in mind

A final quick tip for you. Whenever you feel you deserve a “shiny new toy”, go online to look at the status of your debt. This will remind you of your repayment goal and prompt you to put the amount you wanted to spend on that item towards your target.

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