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Is your debt making you dumb?

December 4th, 2013 by ,    photos by Jim Carrey and Jeff Daniels in Dumb & Dumber movie

Hold back your credit card: New research suggests that carrying debt can cause a significant cognitive deficit


In the land of borrowing, life is pretty sweet right now. Interest rates are low, job rates are relatively strong and, as a result, people are able to manage quite a bit of debt. A poll conducted by Royal Bank in October found that a full 76 percent of Canadians are carrying non-mortgage debt, and most of them are carrying a lot of it - about $15,000 on average. But at what cost?

Although the interest expenses certainly take money out of your pocket, debt doesn’t just cause a fiscal deficit; it also causes a functional one.

We’re not quite sure how to put this nicely, so here it goes: Carrying too much debt can make you dumb...or dumber, at least temporarily.

Here we’ll take a look at why this happens - and what you can do to mitigate the effects if you’re struggling to get out of debt’s grip.

Dumb and dumber

Think about a time when you faced significant financial hardship. Maybe you’d lost a job and consequently found yourself depleting your savings and maxing out your credit. You probably spent a great deal of time racking your brain to determine where you could come up with the money you needed just to get by. Indeed, the solutions to major money problems are often complicated, and according to research by Princeton psychology professor Eldar Shafir, the cognitive load required to think through and weigh all your options actually causes significant brain drain.

Think about it this way: Managing finances is often compared to juggling. That’s because even world-class jugglers can only keep so many balls in the air at one time. Add any more, and they’d need an extra set of hands. The same is true for our brains; their capacity is inherently limited. If you’re trying to remember a phone number, you won’t be able to carry on a very good conversation. If you’re trying to navigate heavy traffic on your commute, you might not be able to manage fiddling with the radio station. And if you’re living on the financial edge, you’re probably paying a lot of attention to how much money’s in your checking account, how much space you have left on your credit card, when your paycheck’s being deposited...it’s exhausting.

Indeed, juggling all these factors all the time is really hard work on your brain, especially when there’s no easy solution in sight.

This is your brain on debt

The biggest problem with juggling debt all the time is that unlike the guy juggling golf balls for fun, you don’t get to put all those balls down and relax when you get tired. And that, according to Shafir, doesn’t just cause inattention - it causes a significant cognitive deficit that amounts to up to 14 IQ points. In case you’re wondering, that could mean the difference between average intelligence and borderline genius.

Plus, the more brain-drain you have, the more likely you are to compound the problem with poor financial decisions (you know, the kind that tend to increase debt).

Take payday loans, for example. With annual interest rates (APR) that approach 600 percent (yes, you read that right), payday loans are a major financial pit. For those who are desperate enough, however, they’re a lifeline. They make it possible to keep juggling - at least in the short while.

In this scenario, forget spending precious brain time on making sound daily financial choices. The ongoing financial juggle – keeping those balls in the air - becomes the only thing on a person’s mind. No wonder those in debt often report feeling so overwhelmed.

Don’t be dumb

This new research around debt isn’t exactly encouraging, though it does provide some insight into how those with debt can reduce the cognitive drain it causes. For many people, that may be the key to begin digging themselves out.  Here’s how…

  1. Ease up on stress

Juggling debt is heavy-lifting for the brain, so it might pay to lighten the load on other brain-draining activities. Shafir says these run the gamut from working a stressful job to sticking to a diet. Stepping away from them might make the solution to getting out of debt a little clearer.

  1. See the bigger picture

Debt can provide laser focus; all you can see are all the places money is going in and coming out of your budget. That’s partly how those with big financial problems manage to keep the whole circus running for so long. Of course, that laser focus means your attention is taken away from everything on the periphery - including solutions that could help you get out of the financial mess altogether.

If you can become aware of this tendency, you might be able to peek beyond your blinders to think about what you can do beyond just getting by. This could include finding a higher-paying job, downsizing your home, or selling off some of your possessions to bring down your debt load. Whatever possible solutions exist, they’ll be very hard to see if you’re only focused on keeping your creditors at bay.

  1. Maintain an emergency fund

In an interview on CBC’s The Current, Shafir recommended that people save and maintain an emergency fund, even while paying off debt. That way, if you run into short-term financial hardship, you won’t have to start juggling all over again. Whether you have a sick family member or a roof to repair, you’ll be able to focus on taking care of business, rather than just on how to pay for it.

Any questions?

If debt has you feeling drained, it isn’t just your imagination - it might be sucking at your brain cells as much as your budget.  So lighten your debt load and give the old Rubik’s Cube another go. You might just be smarter than you think.

Jun 26 2017 12:17am

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