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The Psychology of Taking On and Living with Debt

Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.

Most people know that they should make financial decisions using mathematical calculations that don't take emotions into account. However, that's not the actual approach that most people take. That's because nearly all money decisions — including your approach to debt — reflect psychological factors often rooted in the way that you experienced money in your family as a child. Were they savers who watched every penny? Did they regularly splurge on luxuries, saying "You only live once"?

When it comes to debt, physicians often have an added psychological layer that stems from the way that they're borrowed money to finance the education that enabled their career. As discussed in Chapter 1, more than three quarters of recent medical graduates finish school with debt, owing an average of more than $240,000.

In addition to having substantial debt, young physicians' experience of taking on that debt often differs from the experience of nearly any other consumer who needs to borrow money. Federal student loans require a few clicks and a relatively seamless application process. By comparison, getting a mortgage — the largest debt typically taken on by nonphysicians — requires an in-depth application process with multiple rounds of paperwork and stringent credit analysis that can feel quite invasive.

Because physicians have such an unusual experience taking on large loans at such a young age — without the immediate income to pay it back — it's easy to develop a less thoughtful approach to debt in general. Getting such a large loan, so easily, so early in life can oversimplify your response and understanding of debt in the future.

Furthermore, there is little to no formal training on personal finance during medical school or residency training, so it's easy for physicians to end up overconfident and undereducated about borrowing money — a state that can leave them at risk for making debt mistakes in the future. For example, they may choose a loan that's quick and easy to get, even if it's not the best approach for them financially.

In addition, physicians sometimes fall into the trap of "future discounting" their debt. That means that they're more focused on the immediate impact of debt on their financial picture (often reflecting years of living paycheck to paycheck as a med student or resident) rather than its effect on their long-term ability to reach their financial goals.

As a med student borrowing to pay for school, the thought process was that you'd make more money in the future and be able to easily pay off a large amount of debt. Although that may be true for other types of loans as well, physicians often underestimate how much large debt will affect their lives in the future.

The fix? First, being aware of the issue can help you make better debt decisions. Remember, it's normal for borrowing large sums of money to be an in-depth process that takes time and requires significant documentation. It's also important to look not only at the way that new debt will affect your current cash flow but also its long-term effect on your ability to reach your financial goals.

Debt Attitudes and Biases

Beyond the impact of student loans, physicians, like everyone else, may have ingrained beliefs and cognitive biases that influence their approach to debt and money more generally. These biases may change over time, but understanding your relationship with finances can help you examine financial decisions to determine whether biases are factoring into your choices — and whether those choices are the best for you from a long-term financial perspective.

Let's review various types of bias as they relate to debt.

Debt aversion. This is a bias against debt. People with debt aversion may avoid any kind of debt, even if it might help improve their financial situation. This often goes hand-in-hand with risk aversion in financial decisions. Ensuring that you have the available cash to pay for small or medium-sized purchases can be a great financial tactic to prevent accumulating bad debt. However, if you limit yourself to purchasing only the items for which you have the cash, you may shut yourself out of larger purchases, such as a home or even a practice.

Neglect of probability. This means that a person may underestimate the risk for negative events or emergencies. This is essentially the opposite of a risk aversion bias. Those who apply this bias in their financial decisions may take on more debt than expected or underinsure themselves against unexpected events. They will often take on debt without protecting themselves with something as fundamental as disability insurance.

Present bias. People focus on today and don't think enough about potential future circumstances. This bias results in the future discounting discussed above and can lead to an overemphasis on current conditions when making financial decisions without considering long-term implications. This is a very common response to chronically living paycheck to paycheck.

Overconfidence bias. As its name suggests, this bias is the tendency to overestimate your own expertise in making financial decisions. This can make you more likely to make money choices without fully understanding their implications.

Confirmation bias. This is the habit of looking for information that confirms the conclusion that you've already reached and ignoring information that might disprove it.

Working With Your Partner on Money Biases

Because everyone brings some cognitive bias to their financial decisions, conflicts can arise when two people begin making money decisions together. This is particularly true when there's a significant imbalance in the financial contributions of each partner, or if you and your partner have substantially different attitudes toward money and spending or saving.

Disagreements about finances and debt are common. One in three couples surveyed by TD Bank said that they had argued about money in the past month, and a 2018 study by Ramsey Solutions found that money fights are the second leading cause of divorce.

There are several ways to minimize money-related conflicts within your relationship.

Schedule money dates. Have a set time once a week or every other week to talk about money issues. This way, no one feels blindsided by the conversation, and you get into the habit of regularly talking about your finances.

Keep each other's money biases in mind. No-one makes entirely rational decisions when it comes to money. Talk about how your families approached money growing up and consider whether that may influence some of your different strategies. Although you may not always agree with your partner's point of view, this may help you understand it better.

Bring in a neutral third party. A financial therapist, or even a financial planner, can serve as an unbiased sounding board and help you reach decisions that meet both your and your partner's best financial interests.

The Psychological Impact of Debt

In addition to understanding the psychology of taking on debt, it's important to recognize the ongoing emotional impact of owing large amounts of money. Nearly three quarters of those with debt told the Motley Fool that they think about the financial burden more than they want to. Having chronic debt can cause psychological changes that can lead to inflexible thinking around personal finance.

Constantly worrying about your debt can eat up cognitive bandwidth, leading to decreased cognitive function, which can affect your productivity at work and in other areas of your life. People who carry chronic financial stress have worse scores on cognitive testing and increased anxiety. Money stress can even exacerbate existing health conditions.

People who are worried about their debt also tend to be present-biased — meaning that they're more likely to look for short-term solutions to their financial woes, even if doing so causes larger financial problems in the future.

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Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.


Ned Palmer, MD, MPH; Michael Jerkins, MD; Beth Braverman

| Disclosures | January 01, 2022

Authors and Disclosures


Ned Palmer, MD, MPH

Part-Time Instructor, Department of Pediatrics, Harvard Medical School; Staff Physician, Department of Medical Critical Care, Boston Children's Hospital, Boston, Massachusetts

Disclosure: Ned Palmer, MD, MPH, has disclosed the following relevant financial relationships:
Serve(d) as a director, officer, partner, employee, advisor, consultant, or trustee for: Panacea Financial, LLC

Michael Jerkins, MD

Physician, Department of Internal Medicine and Pediatrics, Baptist Health, Little Rock, Arkansas

Disclosure: Michael Jerkins, MD, MEd, has disclosed the following relevant financial relationships:
Serve(d) as a director, officer, partner, employee, advisor, consultant, or trustee for: Panacea Financial, LLC
Serve(d) as a speaker or a member of a speaker's bureau for: Panacea Financial, LLC
Have a 5% or greater equity interest in: Panacea Financial, LLC

Beth Braverman

Freelance writer, New York, NY

Disclosure: Beth Braverman has disclosed no relevant financial relationships.