The Hidden Cost of Spending While In Debt

Courtney and I are big fans of what we call “mental filters”. These are simple little tips and tricks that we can use to increase our financial awareness. (J.D. likes to call these tips and tricks money hacks.)

For example, I've talked before about how we taped a picture of our daughter to our credit cards while we were paying down our debt. Many people I know use some sort of 30-day rule to curb their impulse desires, especially those which contribute to clutter.

Both of these techniques are examples of deliberately installing a barrier between yourself and a routine action. Many of us do this in various aspects of our lives to help raise consciousness, but this technique can be particularly powerful in our finances.

Today, I want to share a mental filter (or money hack, if you prefer) that Courtney and I used while passionately attacking our debt. But first, let me share a quick story:

The $6.25 foot-long
Once upon a time, I was approached by a close friend with a question about his credit card statement. He knew one of his rates was out of control, but didn't know how to go about asking for a reduction (or even where to find the details on his statement).

Always the good friend, I offered to look over the statement for him. As my eyes drifted down the page I saw a frightening sight: 24.99% APR!

Yikes! The amazing thing was that he'd been paying consistently and timely for well over 18 months at this rate! He'd been paying the minimum payment, and occasionally making a small charge here and there. Because the interest was 90% of his minimum payment, his balance was simply treading water and at this rate he was never going to get out of debt.

Trying to help him brainstorm options (and trying to light a little fire under his butt), I turned to him and asked, “Do you realize that, until we get this fixed, every purchase you make is actually costing you 25% more?

My friend thought for a second and replied, “I guess you mean because I could use the money to pay down the card. I never really thought of it that way.”

To be completely honest, neither had I before that very moment. I pondered the concept for a second and then shoved it into the back of my brain as we piled in the car to search out something to eat. As we drove through town we came upon the very difficult choice every person has to make at some point in their life: Subway or Taco Bell?

My friend paused and then said, “I'm definitely going to Subway. You just can't beat the $5 dollar foot-longs!”

I tried to fight the urge, but I couldn't resist: “More like a $6.25 Foot-loooooooooong!”

Realizing I'd just sucker-punched him, my friend snapped back, “You know, maybe you should change the name of your blog to Man vs. Fun!” Ouch!

The hidden cost of being in debt…
While my friend ended up getting the best of me in the story, I did revisit my side of the conversation a couple of days later. At the time, our highest interest rate on a debt was about 14.5%.

I realized that mentally tacking on an additional 15% (or so) to my purchases might help ensure that I only spent on items that were specifically budgeted for or that were absolutely essential.

Note: I realized then and as now that the math is a little bit fuzzy. Only in the case where the extra spending took exactly a year to pay off would neglecting to pay down a 15% interest rate yield exactly a 15% premium. Nevertheless, it's a rough and convenient rule of thumb.


From that moment on, I tried to think of any non-essential expense as if it was marked up by a 15% premium.

You know what? It worked. It didn't really affect the small purchases as much — I wasn't fazed by an additional $0.25 or $0.50 tacked on — but when it came to purchases of $50, $100, or $150, I started to feel the effects.

Psychologically, nobody likes to pay a premium. Even if it's still a fantastic deal, none of us enjoy paying what we think is a 15% premium.

The only downside I can see to this mental filter is if it were taken to an extreme. There's no need (and certainly no benefit) in examining every single purchase through a tiny microscope. For us, we never felt pressured on expenses that were truly needs. I didn't feel pinched to buy a loaf of bread because I had 15% credit-card debt.

This wasn't necessarily a life-changing tactic that we employed, but a combination of these small mental filters did play a huge role in our financial turnaround. Each one helped raise our overall awareness!

J.D.'s note: I remain a huge fan of money hacks. Money hacks are identical to what Baker is calling a money filter; they're little tricks you can use to make yourself spend less and save more. There are tons of money hacks in the GRS archives.

More about...Psychology

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