Today we’re gonna talk about [BEEP]. What did I say? [BEEP]
Look I know [BEEP] is technically a four-letter word but how are we ever gonna get out
of [BEEP] if we can’t even say the word [BEEP] …DEBT! Ha! Gotcha! Among the subjects that people like to talk about debt ranks right between
toenail fungus and other people’s dreams your brain just doesn’t want to hear it.
And that emotional reaction is partly why it’s so hard to pay it off. But there’s hope! Researchers have figured out a way to
rewire your brain into taking this monster head-on. Not only can it save
your finances it can teach you a lot about how your brain works
and maybe in the future you won’t have to be afraid of the word [BEEP]. Oh, come on! The average debt holder in America
currently holds about $8,000 in credit card debt over three cards! $26,000 in student loans another $10,000 in car loans. That’s a lot
for one person to manage and they all have different interest rates, terms and
loan balances. In short it’s a bit of a confusing mess. So how do we get started? First things first you’ve got to mind the gap. The gap is
the difference between what you make and spend in a month. Without a gap there’s
no money available to make any kind of progress. The two ways to widen your gap
are more income or less spending. Hopefully it’s a mixture of both. Once
you have a gap to work with it’s time to think of strategy. If you ask a
mathematician how to structure your debt they’d probably recommend something like
the Avalanche approach. You list your debts by interest rates with the highest
at the top and the lowest at the bottom. You pay minimums on everything except
the loan with the highest interest rate which gets the biggest part of your gap.
Once that one’s paid off you use the increased cash flow to move down the
hillside like an avalanche. By the time you get to the bottom you save the most
money because you paid as little interest as possible!
It’s mathematical it’s logical and it doesn’t work very well… The Avalanche approach may be mathematically sound but it omits one
important factor… your brain! Humans aren’t robots or Vulcans they’re
emotional beings. They get discouraged, they get overwhelmed, they have trouble
staying on course. It’s the same reason why those debt consolidation plans can
be a bad idea. It may seem like you’re simplifying your life to put all of your
loans into one big basket but what it really does is create a giant
hulking dead monster that feels so intimidating your brain just gives up. So is there a method that works with your brain’s psychology instead of against it?
Well it turns out… Julia we’re in the middle of something here. I know I was
about to put it down but then I cleared a boss stage and upgraded the frosting
on my cupcake cannon I think I can get to the persimmon palace by bedtime! Turns out the same mind-control techniques found in video games can work with your
finances. Game designers strategically dole out positive reinforcements.
Clearing a board of gems, upgrading your loot which floods your brain with
pleasurable dopamine and keeps you playing. At first these rewards are
handed out easily and often to get you hooked and then more spaced out and
difficult as time goes by. It’s really effective and a little bit evil but the
same brain hacking technique can be used to pay off your debt.
It’s called the “Snowball Method”. Instead of listing your debts by interest rate
we list them by balance. Like the Avalanche approach you pay minimums on
all of them except you focus your firepower on the smallest balance. Once
that’s wiped out you roll the extra cash down the hill to the next highest
balance and so on and so on. The snowball method ensures you easy victories early
on to keep you motivated. Every time you cross a debt off your list
it’s like slaying a beast and upgrading your weapon. Your brain will keep
chasing that dopamine fix even as the levels get more challenging. [MUSIC] While someone using the snowball method
will technically pay more overall interest than someone using the
Avalanche approach that assumes that they’re both going to see it through. But
a study by Northwestern University found that snow ballers were much more likely
to actually stick with the plan and successfully eliminate their debt even
if they owed more money than the Avalanchers. Because they gave
themselves that dopamine edge… Oh, [BEEP]! Julia… Sorry. No matter what method you use the
hardest part of getting out of debt is often just starting. And it can get
lonely because, you know, people don’t like to talk about it. But with
determination and planning you can turn debt into something you don’t want to
think about into something you don’t have to . And that’s our two cents! [MUSIC]