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Battling Debt and the Scarcity Mindset

Posted by Rebecca Hellmann on Nov 13, 2019 11:12:26 AM

If you feel like your financial woes are wearing you down, you aren’t alone. Economic insecurity consumes a great deal of mental energy and generates large amounts of stress. Both can be physically and cognitively taxing. In short, your money woes are affecting more than your pocketbook. They have a direct impact on your ability to make decisions.

The phenomenon, called “scarcity mindset,” is the brain’s adaptation to hardship (Science). The process is partially a left-over from the past in which humans in harsh conditions needed to place their focus on obtaining shelter and the next meal. Now the struggle is to earn the money required to pay rent and purchase sustenance. These needs become all-consuming to the detriment of planning for the future.

Princeton psychologist Eldar Shafir, author of the 2013 book “Scarcity: Why Having Too Little Means So Much,” notes that humans have a limited amount of cognitive bandwidth. “We call it tunneling – as you devote more and more to dealing with scarcity you have less and less for other things in your life, some of which are very important for dealing with scarcity.”

The result is a tendency for those in bad financial situations to take action in ways that keep them in the same spiral. Three main issues resulting from a scarcity mindset include:

Avoiding big debts

When you are stressed about money, anything other than food and shelter often falls by the wayside. Typically, these are debts that do not affect immediate survival, such as student loans and medical bills. In extreme cases, the issues of basic utilities are also addressed only when they become a matter of urgency. However, ignoring the debts creates a more compounded future problem. Interest rates will increase loan balances. Healthcare providers will sell debts to collection agencies. Lack of payment can also negatively impact credit scores.

There are ways to manage large debts that can alleviate some of the stress as well as the future impact.

  1. Student Loans – There are several programs and options to deal with student debt. Some loan companies, such as FedLoanServicing, offer opportunities to change due dates, update to a more affordable payment plan, or be considered for temporary postponement of your loan repayment. Other options include consolidating your loans, income-based repayment plans, and loan forgiveness. (The College Investor, Federal Student Aid, org)
  2. Medical Debt – Even people with insurance can end up with unmanageable medical bills. Fortunately, most medical providers are willing to work with patients to arrange payment alternatives – as long as you contact them before the debt goes to collections.

download-this-free-budget-worksheet

Falling into the debt trap

Over 9 million American households have no bank account. But 24 million of those who do still end up using high-cost lending options such as sub-prime mortgages, payday loans, and auto title loans. If it isn’t a dubious loan, it could be a debt settlement scam or a high-interest credit card.

These high-cost lending options provide immediate relief while increasing debt through hefty interest rates. Those taking on these loans are then saddled with the responsibility of repaying an even more substantial amount of money – further compounding their financial problems.

The scarcity mindset encourages seeking out opportunities for immediate relief of a pressing problem. Methods of “fast cash” are precisely the type of methods that appeal to that ethos. But there are other ways to handle most of these emergencies without incurring additional risk and compounding future financial hardships.

In many cases, the best course of action is to contact the company who holds the debt. They often have programs of deferment, forgiveness, or repayment, which will fit your needs. Informing them of your current situation will help them set expectations for payment.

For situations where an alternative is not available or further assistance is required, there are government programs to help with food, rent, utilities, and medical. If you do not qualify or need more help, there are several non-profit programs and community organizations which are designed to provide aid. (MarketWatch, gofundme)

Prioritizing stuff over self

One of the hardest parts of financial difficulty is the tendency to avoid planning for a better situation in the future. The scarcity mindset places immediate relief, comfort, and happiness first. But planning for the future often requires some sacrifice or additional stress now for a bigger payoff later. Things like cooking meals, opening a bank account, or continuing education seem like overwhelming tasks. It is hard to make long-term changes when you are dealing with unpredictable hours, and any unexpected expense could cost you tomorrow’s dinner. Try tackling one thing at a time.

First, work on your financial troubles. Some of the above resources and suggestions can get you started. Try negotiating lower payments, deferments, or forgiveness for any outstanding debt. Reach out for further assistance as needed. Some localities even offer free one-on-one financial counseling (view a list here).

Once you have started relieving a little of that stress, it is possible to push for a better possible future. Mentoring, free ongoing education programs, and job banks are a great way to gain experience in new areas – with the goal of finding more lucrative income. Some resources include:

A scarcity mindset can be a hard thing to overcome. But a lack of planning, debt traps, and avoidance can only make things worse. With millions of American households fighting this battle, it is no wonder there are so many programs and alternatives becoming available. While standard financial advice might seem impossible and inapplicable for those amid financial hardship, a little more hope for the future can go a long way in pulling through.

Topics: consumer budgets, money management, household budgets, financial education

 

Written by Rebecca Hellmann

Rebecca Hellmann has been researching and writing in the payments technology industry for over six years. Prior to the payments industry, Rebecca developed marketing, branding, and content for businesses such as Bil-Jac, Benjamin Franklin Plumbing, and Homestead Furniture. She currently works as Director of Marketing for FCTI, Inc.
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