Why You’re Better Off Not Borrowing

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Written By Pinang Driod

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Does having more money make you happier? Most Americans think so, yet economists continue to debate the question. A 2010 paper by two Nobel laureates concluded yes—but only for those earning up to about $75,000 a year. In 2021, an economist revisited the issue and found that well-being may go on increasing for much higher income levels as well.

My own work argues that what matters is not how much you have, but what you do with it: Happiness doesn’t rise when you buy stuff, but rather when you use your money to pay for memorable experiences or time with people you love, or when you give it away to causes you care about.

All that aside, there is one thing you can do with money that is very likely to raise your unhappiness: Borrow it without clear resources to repay it. Benjamin Franklin was onto something when he wrote in 1757, “Sleep without Supping, and you’ll rise without owing for it”—in other words, being a little hungry from time to time is better than cadging money to buy dinner. The research shows that Franklin was almost completely right: As tempting and as easy as it is to borrow money “on credit” to fund your unsecured consumption, this type of indebtedness almost always lowers your well-being.

Want to buy happiness? Wait until you have the money.

Most Americans incur some amount of debt: According to the Federal Reserve, about 77 percentof us have credit-card balances, student loans, mortgages, car loans, home-equity lines of credit, or other types of personal debt. (This does not include borrowing by businesses.) Although housing makes up a large chunk of this debt, much of it is for consumer purchases. For example, 61 percent of Americans carry credit-card debt, with an average balance of $5,875, and nearly half of Americans have missed at least one credit-card payment in the past five years.

Some reasons that people borrow—such as difficult financial circumstances—are obvious. But millions of people who are not facing immediate hardship choose to live beyond their means. Psychologists who have studied the personality profile of the typical borrower have found distinct patterns. For example, people who score highly in extroversion and openness to experience may borrow more without backup assets than others. The personality trait most associated with not borrowing is—perhaps unsurprisingly—conscientiousness. And in line with the fact that personality is partly hereditary, researchers have found a link between credit-card debt and genes as well.

The data tell an alternative version of Aesop’s fable of the grasshopper and the ant, in which the carefree grasshopper maxes out his credit cards, while the perspicacious ant lives within her means. And the indebted grasshopper will not generally end up any happier than Aesop’s original. According to a survey from Forbes Advisor, 54 percent of people in debt say they always or often feel stressed about it. Scholars have found that in Asian countries, large debt may be associated with depression, anxiety, and even suicidal ideation; in Chile, “persistently over-indebted” individuals tend to exhibit higher levels of depressive symptoms. For those overdue without backup, indebtedness can also lead to poorer health and more physical pain, compared with those who have little or no such debt. In addition, financial disagreements rate as some of the most serious kinds of marital conflicts, and more than half of Americans think that a partner’s indebtedness can be a legitimate reason for divorce. People rarely mention their credit-card debt on the first date.

Of course, not all debt has the same impact on well-being. Studies generally do not find a link between unhappiness and mortgage debt, for example. Most likely this is because the alternative to paying a mortgage for most people is writing a rent check—not an obviously happier scenario. At least making a mortgage payment has the benefit of gradual progress toward ownership. And buying a home isn’t usually grounds for divorce.

Non-mortgage debt, however, is unambiguously negative in its effects. This is especially true of credit-card balances. This makes sense when we consider the evidence that progress toward a goal is psychologically rewarding—arguably, even more so than attaining it. Saving for a major purchase such as a couch or a vacation gives a psychological reward each time your bank balance goes up. In contrast, the only progress you make from paying off the money you borrowed for the couch or the vacation is being slightly less in debt, although you also have the interest to pay, too. By the time the debt is paid off and you own the item outright, the couch will have holes and the sandy beach will be a distant memory.

Student loans are another form of debt that harms happiness. Studies show that such debt is correlated with stress. The size of the debt also matters: Unhappiness and burnout are higher when student loans are larger. Again, this is very likely because carrying the debt inhibits the satisfaction of making progress toward financial freedom and security.

Plenty of surveys report that millions of Americans live paycheck to paycheck, and many rely on credit at least part of the time. I’m not here to criticize that; it’s an everyday reality for a lot of people. My point is that being indebted really affects your well-being, so the more control you can exercise over your financial circumstances, the better for your happiness. And to that end, here is some practical advice, based on evidence that yields three basic rules.

1. Don’t borrow for discretionary consumption.
Well-being suffers when we consume today and repay tomorrow. Sometimes this is necessary—for example, if you’re short on money for rent or groceries. But when it comes to optional purchases on credit, better to say no. If possible, endeavor never to carry over a credit-card balance. Buy the cheapest car you can afford to avoid or minimize an auto loan. If you’re struggling with that idea, try this little thought experiment: Imagine how you will feel about that sweet new car in, say, five years’ time—when it has taken a few dings and scratches; imagine how you’ll feel then about making the huge payments on it.

2. Borrow the minimum even for personal investment.
Student-loan debt can be a good investment, but the greater the debt, the worse its effects may be on your happiness. Not long ago, I met a professional who was hundreds of thousands of dollars in debt while working for a very moderate salary. She judged her career choice to be a mistake—not because she disliked the work but because the decades of payments ahead felt like a wolf at her door. Make your school and career choices with this in mind.

Although mortgage debt appears in the research not to lower happiness, no studies I have seen adequately control for the percentage of income that your monthly payment represents. The right housing decision for your well-being is probably not the conventional wisdom of “as much house as the bank will let me borrow.” Shocking as it seems, the bank doesn’t care if you are happy.

3. Mind your habits, grasshopper.
If you told me that your family has a history of alcohol abuse and you were worried about your own drinking, I would give you some obvious advice: Quit. The same holds for susceptibility to overborrowing: We have evidence that an ebullient personality and impulsive genes can make you vulnerable to spending on credit. If you recognize this tendency in yourself, take action for self-preservation. Make a budget and stick to it. Use a debit card instead of a credit card. And avoid salespeople who can “really see you in that car.”

To avoid borrowing in order to avoid unhappiness is a useful plan, but it also involves, in some sense, pursuing a negative. This does, however, suggest a positive corollary: To be happier, save money. Researchers have indeed found that having savings enhances happiness. And you don’t need some huge trust fund; one study showed that simply having “cash on hand” increased financial well-being, which in turn predicted higher life satisfaction. As other scholars have found, this is because savings connect your present to a better future—the progress principle once again.

And the plot thickens: What does a happier person tend to do? Among other things, they save. Establishing the chain of causation between savings and happiness, one economist in 2012 found that happier-than-average people tend to save more and spend less. Putting away a few bucks when you can might just kick-start your very own perpetual-motion happiness machine.

Arthur Brooks is a contributing writer at The Atlantic and the host of the How to Build a Happy Life podcast.

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