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Time is Actually Different when you Owe Money

Time is Actually Different when you Owe Money

People in debt have different time frames compared to people who are not in debt.  Economists and psychologists have all pointed to the importance of the individual’s time frame in making financial choices.  Time frames for people in debt can be very short. For many the furthest into the future they can see is the next pay day.  It’s not that they don’t want to think about it. It is that they can’t actually see that far into the future.  In comparison time frames for people for high income individuals can be very long. They might be in their 20’s and they’re thinking about retirement and how they can pay off a house they don’t own yet quicker. Some high net worth individuals are thinking 2 generations in the future.

The problem is that when people have a short time frame. Things they receive in the future are worth less, they “discount” the future.

This makes it difficult to defer gratification. For someone who can see further into the future, not buying a cup of coffee today can equate to being mortgage free or retiring comfortably. For those with short time frames not having a cup of coffee is just depriving themselves of a small pleasure.  This makes is much harder to get debt free.

Spending on children’s Christmas presents is actually highest in people with large amounts of debts. This is due to time frames.  People with debt are “discounting” how hard it will be to repay the debt in the future.  People with large amounts of debt are also more likely to spend more money on kids fashion items. There are more Nikes sold in ghettos.  Again this is due to time frames. The parents can’t see to the future. Foregoing the shoes, and spending that money on “Hooked on Phonics” is just depriving their kids of shoes.

People in debt are also less likely to sign up for prepayment methods (direct debits for car rego, electricity, lay-buy). For people with short time horizons it will be easier to find a larger amount of money in the future than it will to find a smaller amount of money today.  This is crazy of course because if they can’t find a couple of dollars today it’s going to be impossible to find several hundred dollars later on.

Take control of your debt time!

Thankfully your time frame isn’t set at birth.  You might have a predisposition and your family and friends influence you but if you want, you can change.  You need to create space for you to think about what future you actually want.  Go somewhere and for a couple of hours think about what you want and WRITE IT DOWN.  Now that you know what you want you can write out the steps you need to take in order to get there.  When you have to make a choice, like buying a coffee, or buying new clothes, you can ask yourself if they fit your long term plans. Setting up direct debits for your bills is the low hanging fruit of financial success, it’s very easy and will dramatically reduce stress.

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