Despite a booming economy, U.S. household debt is soaring. In the fourth quarter, household debt grew at its fastest rate since late 2007—before the financial crisis.
Americans collectively owe more than $13 trillion, including $9.3 trillion in housing debt and $3.8 trillion in non-housing debt—from credit cards to auto loans. In fact, the Federal Reserve attributes much of the rise in household debt to booming auto sales, as Americans have more savings to spend on car ownership or a monthly lease.
So how do you snap out of it? Try using behavioral economics, which applies psychological insights into human behavior to change financial decision-making.
Here are a few pointers:
- Avoid procrastination. You’re never tempted to pay off debt. You’re tempted to spend money on new clothes and fancy restaurants. Understand your temptations, and counteract them with common sense.
- Set up automatic transfers. Because you’re not tempted to pay off debt, force yourself to do it. Set up an automatic monthly payment, so you don’t even have the option to change your mind. Eventually, you’ll just accept the automatic payment as a fact of life.
- Build a habit. Automatic payments build habits. Force yourself to habit-form. Unfortunately, there’s no other way to repay debt than to just buckle down and do it. It will be difficult in the first few weeks, but debt repayment will eventually become routinized.
- Cut entire spending categories. Research shows that cutting an entire category—such as eating out or buying new clothes—is more effective than trimming your spending in various categories. Trimming encourages procrastination, so try the all-or-nothing approach.
- Use peer pressure. Peer pressure works in all sorts of ways. Whether your friends are going to a party or your spouse is hitting the gym, you’re more incentivized to join them than go it alone. The same logic applies to debt: Ask a family member or friend to hold you accountable.