Canadians trying to get out from under may benefit from a few research-backed mental tricks
Once again, Canada’s debt is in the spotlight. Aside from the Bank of International Settlements sounding alarms on the country’s 9.6 credit-to-GDP gap and 2.9% debt-service ratio, a new report from Equifax said Canadian consumers now owe around $1.8 trillion including mortgages.
Given such figures, it may be time for Canadians to think about how to beat their debt — with a little help from behavioural economists.
According to a 2011 study by the University of Michigan, taking care of smaller amounts of debt in their entirety first — the so-called “snowball method” — can be more motivating than prioritizing higher-interest debt, reported MarketWatch. However, others argue convincingly that paying off the debt with the larger interest rate would make more sense.
The debate could become a mental roadblock, but Northwestern University economics professor Dean Karlan stressed the importance of avoiding procrastination. He argued that people hardly agonize over how they spend money — debit, credit, cheque, or cash — so the decision to pay off debt shouldn’t be so difficult either.
“You’re never tempted to pay off debt,” Karlan said. “You’re tempted to spend money, and you’re going to have to deal with that.”
According to Emory Nelms, a senior researcher at Duke University’s Center for Advanced Hindsight, setting up an automatic transfer for debt repayments can be effective. He also said cutting out entire spending categories, like swearing off dinners out, is more effective than trying to lessen spending in various expense categories.
Spending can be addictive, especially when peer pressure is involved. But in the same way, Karlan said, one would have a better chance of kicking the habit by asking a trusted friend, parent, or sibling to act as an accountability partner. A support group composed of people working toward a common goal of reducing debt could also be helpful.
Finally, those who discuss their efforts to trim down their debt with others may get positive feedback and feel rewarded. But according to Nelms, it’s best to keep that feeling in check.
“You’re halfway convincing yourself you’re there,” he said, stressing that people must follow through on any plans they have in place.