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What Debt Does To Your Brain - Money Psychology
Money Psychology

What Debt Does To Your Brain - Money Psychology

A major falsehood that is often peddled around about money is that it’s all about math. The truth is that each one has a unique relationship with money, and as is the case in all relationships, emotions are involved. This line of reasoning also applies to debt. 

Debt is an emotionally-packed word that often triggers emotions such as anxiety or even guilt. In the current era where accessing credit is as easy as a few touches on a smartphone, it is essential to not only have the right attitude towards debt but also to understand the psychological aspect of debt.

The fact that debt is part and parcel of most households in Kenya makes it even more important to understand the subject.

To paint a picture, 2021 data from the Central Bank of Kenya shows that 11.42 million bank account holders accessed loans worth Ksh843.59 billion, accounting for 28.06% of the Ksh3 trillion that commercial banks loaned out during that period.

For comparison, Kenyan households borrowed Ksh9.5 billion in 2000, which was only 3.3% of the total amount loaned out by banks during that financial year. This means that Kenya’s household debt has increased 89 times in just 2 decades.

It is also important to note that the CBK data did not account for loans advanced by digital lenders, shylocks, and others.

Simply put, debt affects a major chunk of the Kenyan population.

Good Debt Vs Bad Debt

From the get-go, it is important to note that not all debt is bad and that there are types of debt that can actually lead to wealth creation – otherwise known as good debt. 

On the other hand, debt taken up to satisfy instant wants that cannot be classified as economically viable can be termed as bad debt. This also includes taking on debt that cannot be repaid under the stipulated measures.

Then there are types of debt that have triggered debates. For example, some believe that taking up a car loan is bad, but is it really that simple?

The amount of capital saved when one opts to go for car loan financing that can then be directed towards income-generating activities makes a strong case for good debt. If the car is then used in money-making activities, then the case is even stronger.

These debates could explain why countless scientists have taken up debt as a topic of interest, with most focusing on the psychological perspective of debt.

Read Also: Good Debt Vs Bad Debt: How to Tell the Difference

Debt and Your Brain

The National University of Singapore’s Social Service Research Centre found that paying off debt may actually make your brain work better. 

Having studied a sample size of 200 low-income individuals who had their debt unexpectedly cleared, the researchers found that the average error rates in the cognitive tests carried out fell to 4% once the debt was paid off, compared to a 17% error rate beforehand.

Cognitive tests generally assess one’s abilities when it comes to thinking for example; reasoning, perception, mathematical ability, and problem-solving.

Therefore, the Singapore research team showed that debt directly impacts one’s ability to reason, and solve problems, and most importantly, it has an impact on the decision-making process.

Debt and Decision Making 

A research paper titled The Hedonics of Debt by Faith Shin, Dov Cohen, Robert M. Lawless, and Jesse L Preston from the Department of Psychology at the University of Illinois produced some interesting results.

Having carried out experiments to determine what a borrower uses to determine which debt offer to take up, the researchers found that people tend to place the most weight on the final payment amount, most effectively ignoring the duration of the loan repayment period.

They further argued that when it comes to debt, the decision-maker is heavily focused on final payment and monthly payments, while remaining oblivious to other important features of a loan such as interest rates, penalties for defaults, etc.

In the journal Reducing Debt Improves Psychological Functioning and Changes Decision-Making in The Poor by Walter Theseira and Irene Y.H, Ng from the University of Chicago, it was determined that individuals who had their debts paid off were less present-biased and could thus make objective financial decisions.

One could then argue that having an effective debt management structure is more likely to improve an individual’s ability to make sound financial decisions.

If such an individual is presented with an opportunity to take up debt in order to satisfy some immediate want eg a pair of expensive sneakers, or a loan to boost a small biashara, he or she is likely to choose the latter because having an effective debt management strategy in the past means that they are no longer guided by present bias.

Financial experts state that an effective debt management strategy is one that factors in an accurate depiction of cash inflows which should be able to service any debt repayment schedules without sacrificing basic needs such as rent and food.

Other scientists have gone on to show that there are causal links between debt, overspending, and poverty, going on to show the psychological consequences of the same.

Read Also: Debt and Marriage: Key Things You Need to Know

Does Debt Equate to Poverty?

In Overspending, Debt and Poverty by Anja Achtiger – a journal that examined the link between debt and poverty, it was determined that debt in itself did not guarantee a life of poverty.

The psychological triggers that led to debt were what were seen as potentially harmful. For example, high impulsiveness and/or low self-control were seen to lead to overspending and over-indebtedness.

Over-indebtedness refers to debts that cannot be repaid or those that can only be repaid by experiencing extreme hardship eg sacrificing the food budget to service a loan.

It was also argued that over-indebtedness strongly affected one’s well-being, physical and mental health. It could potentially lead to social exclusion, and poor financial decisions and it could also trigger a spiral of further debt.

This could then lead to the ‘borrowing from Paul to pay Peter’ scenario. This is why financial experts all agree that knowing how to effectively manage debt is critical for financial success.

Read Also: Top 5 Mistakes to Avoid When Trying to Get Out of Debt

Effectively Managing Debt

Here are a few debt management strategies that one could customize to suit their financial situation

Review and prioritise debt – This would involve carrying out a thorough, but more importantly honest financial audit. The aim is to first find exactly how much you owe, then work out what to pay off first.

List them based on the order of priority for example some loans have heavier consequences if payment is skipped, such should go to the top of the list.

Build your emergency fund – This would effectively guarantee that one wouldn’t be forced to turn to costly shylocks to cater to personal emergencies.

Consistency and discipline are the names of the game as even a small emergency fund can cater to little expenses that crop up every once in a while.

Experts recommend building up an emergency reserve that could cover 3-6 months of day-to-day living expenses.

Evaluate monthly spending – This is another self-audit exercise, only this time, the focus is purely focused on cutting down on expenses that could trigger debt.

Having two lists; essentials such as rent, utility expenses, food, etc, and extras such as entertainment, and designer sneakers could be a good place to start.

This way, one can easily determine what they are spending their money on and if it is worth it. It would then be hard to justify taking on debt to cater to items in the ‘extras’ category.

Seek help – If servicing one’s debt is proving impossible based on monthly cash inflows, experts advise reaching out to creditors as a viable solution.

The conversation should then be geared toward coming up with an adjusted repayment plan that works for the borrower.

Read Also: Coping With Debt: How To Deal With Debt of Any Size


All the research papers examining the psychological aspect of debt agree on one thing, debt in itself is not bad. However, taking on bad debt could have a major impact on one's physical and mental health, as well as impact heavily on future financial decisions.

It is therefore important to understand all the obligations and financial implications of taking on any debt, to ensure that taking on such debt is driven by not only right but economically viable reasons as well.

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Eddy Mwanza is Creative Consultant living and working in Nairobi, Kenya. His areas of focus are Content Creation, Creative Writing, Research and Photography. When he is not writing in his favorite coffee shop, Eddy spends most of his time reading, cooking, and traveling. He is also a sports fanatic. Connect with Eddy on LinkedIn.

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