How Our Emotions Can Lead to Debt Problems

How Our Emotions Can Lead to Debt Problems

We make a lot of purchasing decisions every day. But are our decisions as simple as needs vs wants? Sure impulse purchases can cause debt problems, but sometimes even when we think we are making the right financial choice we may not be. Our emotions can make us think we are behaving rationally when we are not.

Our average client has over $50,000 worth of unsecured debt and, contrary to popular believe, the vast majority didn’t get there by going on a spending spree. Yet their initial road into debt can often be linked to their behaviour around how to handle financial decisions.

Numbers are Rational

Over the years I have had hundreds of clients who financed a house that ended up being more expensive than they could afford. So they ran some numbers, made a budget, looked at the monthly payment and decided their choice made sense.

That one purchase caused other debt problems. A bigger house meant more furnishings, higher property taxes and insurance, larger repair bills. An expensive car bought on an 84-month at the end didn’t look so good.

When I ask them why they made that purchase, even though in hindsight it was obviously more than they could afford, they give me many rational reasons. They tell me the mortgage payments are cheaper than rent; the house will go up in value enough to cover off the extra costs; the new car is covered by a warranty so I will save on car repair costs; I will save money because it had better gas mileage; or it was more reliable so I will make it to work on time. All this seems logical but it isn’t.

Humans Can Be Irrational

Those are rational reasons, but when I ask more questions it becomes apparent that they bought the house or car for emotional, not rational reasons. They were afraid house prices would keep going up, so they bought now, or all of their friends were buying, so they did too. They bought that car because they really wanted that car and the financing person at the bank or car dealership made it look affordable.

True rational choices take time. They take research. They take math. And that’s hard. Which is why we let our emotions rule our decision making.

If you want to make good financial choices, it’s not just about creating a budget. Take the emotion out of the decision. Ask yourself why you are making that decision so you force yourself to try to look at things rationally.

Resources mentioned in this show: 

FULL TRANSCRIPT show #159 How Emotions Can Lead to Debt Problems


This year on Debt Free in 30 I’m devoting some of our shows to money questions that you don’t hear answered a lot, but can have a big impact on your financial health.

Here’s today’s question:

How do our emotions lead to debt problems?

At first glance, this may seem like a very obvious, or a very silly, question.

It’s obvious because sometimes you are in a store, and you see something you want to buy, so you pull out your credit card and buy it.  Your emotions told you that you wanted to buy it, and so your emotions lead to credit card debt.  Seems simple. It’s the common needs versus wants discussion.

But let’s face it, most people don’t go bankrupt because they put $100 on their credit card with an impulse purchase at a store.

Our average client has over $50,000 in unsecured debt. It’s pretty obvious that it’s more than just impulse purchases that are causing their debt problems.

Yet it’s still our emotions that can be linked to almost all of our debt.

You probably don’t think you let your emotions rule your big financial decisions.  You believe that you only use a rational thought process to make your big money decisions.

Let’s test that theory.

Let’s talk about Fred.

Fred wants to buy a house.  Being logical, what does he do?

Fred starts by making a budget to see what he can afford.  Then he contacts his bank to get pre-approved before he starts house hunting. The person at the bank  crunches the numbers to tell Fred how big a mortgage he can afford.

It’s all numbers, and numbers are not emotion.

Numbers are rational.

But wait. The bank rep tells Fred he can actually afford a bigger mortgage than he thought. Fred is happy, because he thinks real estate prices will go up, so he’s happy he can finance a more expensive house than he thought, because now he’ll make even more money, and he doesn’t have to worry about missing out and not being able to buy before prices go even higher.  Fantastic!

What just happened there?

Fred was swayed by his emotions. His fear of missing out influenced his decision.  That’s emotion.  His elation at the bank approving him for an even bigger mortgage than he expected is also based on emotion, not rational thought.

Of course not everyone gets pre-approved for a mortgage first.  Lots of people see a house for sale in their neighbourhood, and because it’s a nice house near the kid’s school you make an offer on it, and then figure out later how to pay for it.  That’s obviously an emotional approach to financial decision making.

Here’s a question for you: why did you buy the car you have now?

I ask a lot of people that question.

They often tell me they shopped around, and that this car has the best gas mileage, or safety rating. In other words, it was a purely rational decision.

Then they tell me they got the best value for money or they got the lowest monthly payment from the car dealer.

Sounds reasonable. When it comes to money, we make rational decisions.

Money is numbers, and there’s nothing more rational than a number, right?


I can tell you lots of stories of guys, and it usually is males, who bought a car that ended up getting them into financial trouble.

I ask them the numbers, and it usually takes a bit of thinking, but then they:

  • Tell me that their loan payment is $600 per month.
  • Their car insurance is $400 per month.
  • And then there’s gas and the occasional oil change.

That’s $1,200 per month.  They make $2,400 per month, so their car is costing them half of their income.  I see it all the time.  They only have $1,200 per month to pay rent and buy groceries and live, and they can’t do it; there isn’t enough money left over after paying for their car expenses.

So I ask them, why did you buy the car that you can’t afford, and they give me more rational reasons:

  • I need it to get to work;
  • My shift starts early and I can’t take the bus;
  • I bought a new car because I don’t want to be stuck with big repair bills.

Those are rational reasons, but are those really the reasons you bought the car you drive today?

I don’t think so.

Think back to when you bought your car.

You walked into the car dealership, and you looked at the cars. You had an idea of what you wanted but in truth you likely picked one that looked good, or was a nice colour, or was big, or fast, or had whatever characteristics you were looking for in a car.

You took it for a test drive, and the salesperson said “imagine what it would be like driving to work in this baby!”

See what happened there?

Each step along the way you made a decision based on emotion.

You liked the look of the car, you liked the colour, and you really liked thinking about what your co-workers would say when you drive up to work in your new car.

Those are emotional responses.

So why, when I ask you why you bought the car, do you tell me it was because of the gas mileage or the safety rating?

It’s because we don’t want to appear to be emotional decision makers, so after the fact we justify our emotional decision by citing rational justifications for our decision.

Most of our money decisions are emotional, not rational.

Now I know, you don’t agree with that.

You agree that most people are emotional, but not you.  When it comes to money, you make sound, rational decisions.

Okay, let’s put that opinion to the test.

When you walked into the car dealership, who greeted you at the door?  It was the salesperson.

And you, being the rational person that you are, immediately said “before I talk to you, I want to talk to the finance manager please”, right?  That’s how it happened?

Because if you are a rational person, you would want to crunch the numbers first to determine what you can afford, and then start looking at cars.

But of course, it never happens that way.  The finance person is the last person you talk to, not the first.

The salesperson knows that if they start by talking to you about money, you will probably end up buying the car that has a $400 loan payment per month, not the $600 one, and that’s not as good for their commission. Or you will want a five-year term where you pay less in interest, not an eight-year term to make the monthly payment lower even though that means you pay more in interest, and that’s not as good for the finance manager or the salesperson.

They want you to make an emotional decision first, and then justify your decision with rational reasons later.

I’m not criticizing the car dealer.  They are doing their job.  It’s not up to them to analyze your finances.  Their job is to sell you a car.

Here’s another example: last week on this show we talked about student loan debt, which is now at epidemic levels in Canada.  Why do students get into so much debt?  Often, it’s because they make an emotional decision to go to college, not a rational one.

If you knew at the start of university that you would graduate in four years with $50,000 in student loans, and that you wouldn’t be able to find a job in your field, would you go to school?  Probably not.

How many students, before they sign up for school, actually determine what type of job they are likely to get upon graduation, and what that job will likely pay?  How many then calculate how big their student loans will be when they graduate, and how long it will take them to pay them off?

In my experience, very few.

And yes, I realize it is almost impossible for an 18-year-old kid to accurately evaluate what the job market will be four years from now to determine whether or not they’ll be able to repay their student loans.  I get it.  It’s very difficult. And because it’s difficult, instead of devoting a lot of time to doing the research and the math to figure it out, we fall back on emotion.

An 18-year-old student, and their parents, say “you need college to get a good job”, or “college is a good safety net”.  That’s conventional wisdom, based on emotion, not rational arguments.

So why do we rely on emotion when making important financial decisions, like buying a car or going to college?

Because rational decisions involve research, and time, and math, and math is difficult.

When the finance person at the car dealership says they can get you the loan, but it will be an 8-year loan, you don’t take the time to crunch the numbers and figure out how much extra an 8-year loan will cost you as compared to a five year loan.  That’s not a calculation you can do in your head, so you agree to buy the car and move on.

Over the last 20 years I’ve met with well over 10,000 people in financial trouble, and based on my experience, many of those people got into financial trouble because they let their emotions guide their financial decisions.

I’m not saying emotions are bad.  Quite the contrary.  I hope you get emotional when you listen to a great piece of music, or watch a great movie.

All I’m saying is that when it comes to numbers, emotions should not be the main reason you make a financial decision.

So here’s my advice.

First, and most importantly, before you make a financial decision, like buying a car, or a house, or anything else that involves money, ask yourself this simple question:

“Why am I making this decision?”  Am I making a rational decision, or am I letting my emotions make the decision for me?

In practice, this is more difficult than it sounds, because it’s hard for us to take a step back and analyze what we are doing, but that’s what you must do.

Here’s the next question to ask yourself: who is encouraging me to make this decision?  Why?

When a car salesperson suggests you buy one of the cars on their lot, you understand what’s going on.  They are a salesperson.  They want you to buy one of their cars so they can earn a commission.  No mystery there.

But what about when all of your friends, and your parents, tell you that you should stop renting and buy a house; why are they giving you that advice?  Unless your friends or your parents are real estate agents, they don’t earn a commission if you buy a house.  So why are they giving you that advice?

Presumably it’s because they are trying to help you, but this is where you must think hard to understand where they are coming from.

If your parents have owned a house for the last 30 years, their house has gone up in value, a lot, so since owning a house was a successful strategy for them, they want you to follow the same path.

That’s understandable.  That’s why the conventional wisdom is that owning a house is the most important investment you can make.

But just because your parents lived in the same house for 30 years and made money doesn’t mean that your experience will be the same.

If you bought a house in Toronto in the spring of 2017 it is likely worth less today, a few months later.  Of course, by next year it may be back up in value.  I don’t know.  But it’s also possible that if you buy a house today you may need to relocate next year, and will have to sell your house, and incur real estate commissions and other costs.

My point is that your situation may be different than your parents and your friends, so you can’t blindly follow their advice.

I get it.  If everyone you know owns a car, you don’t want to be the only person taking the bus.  If all of your friends are flipping condos, you don’t want to be the only person who rents.  That’s why we succumb to pressure from family and friends and make decisions based on emotion.  We want to follow the crowd, but that emotional approach often leads to bad decisions.

So that’s why my final piece of advice today is to think through not only what your decision is, but why you are making that decision.

If the answer is “I have a stable job and I’ll live here for 10 years, and we have a dog and a cat so it’s difficult to rent, and we’ve crunched the numbers and we’re buying a house we can afford, even if interest rates go up” then great, buy the house.

That’s a rational decision, and that’s all I ask you to do.

That’s our show for today.

I’ve got lots more to say about how emotion and conventional wisdom lead us to make bad financial decisions.  In fact, I wrote a book on it.  It’s called Straight Talk on Your Money, and it’s available now in better bookstores across Canada, and online at Amazon and Indigo, and there is also a Kindle and Kobo ebook version, and an Audiobook available at Audible and on Amazon and iTunes.  Full details on the book can be found at

As always, full show notes and a transcript of today’s show can be found at, that’s h-o-y-e-s-dot-com.

Next week I’ve got a great first-time guest, a person who has run one of the top financial information websites in Canada for many years, so you will want to tune in for that special show.

So, until next week, thanks for listening, I’m Doug Hoyes, that was Debt Free in 30.

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