Present Bias And Debt: A Match Made in Hell

A few weeks ago I was talking with a new college grad. I shared my journey out of debt with him, and stressed that the best thing he can do for himself now (at age 22) is to start paying down his own student loans.  He listened, very politely, to my story and agreed that he wanted to be debt free. He had just one question for me: ‘But isn’t now the time to be in debt?’ 

From his perspective, right now it’s totally ok to carry debt. He just finished college, everyone around him has debt, and he’s years away from retirement. So what if he carries those loans around for the next five to ten years? He wants to enjoy right now, and there’s so much life still to be lived. He can pay it off  later, when that kind of stuff matters more. 

This is probably the most common thing I hear from people whenever I get drawn into a conversation about money. (Which is all the time.) People quickly own up to the amount of debt they have, and they know it’s a bad thing. They tell me how much money they pay in minimum payments each month, or about how they’ll never buy a home because of their current debt burden.

And then they follow that up with ‘But that’s everyone right? That’s just how it is. And I want to enjoy myself just a little bit.’

This mindset is the Regina George of finances. It’s a life ruiner- it ruins lives. That sounds dramatic, but it’s really just the truth. This is called present bias.


Present bias

According to CNBC, eight in ten Americans carry some kind of debt, everyone just wants to have a little fun. People fail to plan for the future and make decisions based on what they want right NOW, not what will be best for them in a year.

The college grad’s question has been stuck in my mind for days. Isn’t 22 the best time to be in debt? No major responsibilities, no real collateral to lose. Why can’t he focus on having fun and forget about the loans for a little while?

Here’s what I told the grad. Yes, you should enjoy yourself now. I used to go out to my favorite bar for ‘$2 Tuesday’ and I had a blast every time. I traveled, I ate out, and I lived my life. I don’t regret those things! I just wish I had done them in conjunction with being serious about my student loans, not instead of.

Failing to plan for the long term only hurts you. Everything that you want for yourself will be harder to get the longer you carry that debt. You want to own a home? It’s hard to save, and hard to get the best mortgage rate out there with a huge pile of student loans. You want to travel? It’s going to suck to have to make a $500 debt payment from that beach in Bali.

No one is saying that to pay off debt you have to give up all fun things, forever. Ignoring your debt, though- that will cost you fun things in the future. That interest piles up. Those payments never go away. Owing money to anyone means trading a portion of your life to earn the money to repay them. That’s a part of your life you don’t ever get back. That’s a part of your life spent on things other than what you truly want.

Don’t let present bias rule your life. I told the grad, hey, you didn’t have to pay off all your debt in the next ten seconds. Just starting to make payments now, when you’re still in your grace period, will be a huge help. Paying even $50 over the minimum each month for the first couple months will decrease the length of your total payment plan, and put more money back in your future self’s pocket.

I’m not sure I convinced him to set up those payments ASAP, but I’m glad we had the conversation. I wish I had had that conversation when I was 22. I wish I could have thought to 25-year-old Kara, to 37-year-old Kara, to 49-year-old Kara. I wish I had known that skipping $2 Tuesday once a month and putting that money (and the late night snack money, jukebox money, and gas money) towards my loans would take about a year off my payment plan.

Take a second and think about your future self today. Do something for her. Whether it’s a set of push ups, scheduling an extra payment, or doing laundry, help your future self out.

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7 Replies to “Present Bias And Debt: A Match Made in Hell”

  1. This thinking — the Regina George present bias (LOL) — is exactly the same thinking at play in the bad retirements savings trends I wrote about last week. Everyone seems to say, “well, everyone else is in the same boat as me, so it must be fine.” But comparing yourself to others isn’t the right measure — the right measure is thinking about what future you will wish you’d done today to set future you up to thrive not struggle. Love this. 🙂

    1. Exactly! You don’t want to just close your eyes to the problem now. That’s a great way to ensure you’re in a bad spot now AND a bad spot in the future. You post last week was so spot on (I actually link to it in a post for next week!). It’s hard to think long term sometimes, but it’s so necessary.

  2. I’m sorry. When is the best time to have debt? Errrrrr, never is the correct answer. But in saying that, most of us would never own a house without it so some debt is pretty well going to creep into everyone’s lives at some stage. But using debt to buy toys and ‘have a good time’……..stupid. I hope that doesn’t sound too preachy. maybe a little bit? hehe

    1. I agree that for most of us, debt is unavoidable for things like houses, maybe education. But the mindset you approach debt with is the divider. You and I know we want to get rid of it. To think it’s ok to carry forever…not good. So i agree with what you’re preaching!

  3. “just wish I had done them in conjunction with being serious about my student loans, not instead of” I think this is key because it sets up a really good future of spending and saving, because no matter what age, you still need to have “fun,” but you need to (pay of debt, save for a rainy day, save for a home and save for retirement). It teaches you frugal habits now. Because once you get in spending mode, it’s hard to change.

    1. I totally agree. It’s learning the right and wrong ways to deal with money right off the bat, so that later on those are just ingrained in you. Little 22 year olds, so young and wide eyed!

  4. I found ” I wish I had known that skipping $2 Tuesday once a month and putting that money towards my loans would take a year off my payment plan, even to the recent grads.” to be incredibly powerful and persuasive. Geez, one extra night of Netflix a month means a whole year less of making payments? That’s a pretty easy trade.

    Then again, I’m speaking from 48, not 22. I know the pain of coulda woulda shoulda.

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