How does it happen? Why do so many seemingly level-headed, sensible people into so much debt?
Statistics show that more households are living beyond their means and less are keeping a household budget. Credit cards are increasingly being used to pick up the spending shortfall that household income can’t cover and overall, households are saving less.
Financial hardship is never far away when people have no savings and no resources to fall back on. It only takes one job loss, serious illness or other unforseen event to send a household over the financial precipice.
The government says that it is the lack of financial education and the failure to apply even the most basic of financial principles. Surprising from an organisation that can’t balance its own budget, even with a gazillion employed financial experts and advisers!
While practical financial education is important and something that I hope every Australian student soon studies as part of their school curriculum, there is a lot more to it than a few financial classes.
Financial behaviours symptomatic of deeper problems
There are such a lot of seemingly sensible and level headed people with some quite different attitudes to money, most of which I wouldn’t have expected.
- Living for the moment – focusing on the present not the future and disregarding the consequences of today’s spending
- Aspirational spending – keeping up with the Joneses’
- Financial disengagement – having no interest in managing personal finances either today or into the future, hence not keeping track of spending and not taking responsibility for spending
- Emotional enhancement – spending to feel better and sometimes feeling better can involve spending to get revenge on a wayward partner. It’s the “But I deserve it” attitude.
- Borrowed money as supplementary income – needing more to live to supplement a low income, to replace a loss in income or to support a certain lifestyle
- Misplaced ownership of credit – developing the attitude that ‘it’s my money’ as opposed to borrowed money that needs to be repaid.
To be fair, these behaviours are often symptomatic of what’s going on elsewhere in life. It’s a person’s underlying circumstances that need to be examined. It is too easy to judge people for making the wrong call when decisions about money have to be made almost every day of adult life.
Background and circumstances have a great influence on financial decision making. It can have a lot to do with your parent’s financial experience while you were growing up and of course the attitude to money of the person you are currently with or most recently separated from.
The financial influencers in your life might be quite dominant in relation to your views on money, or they could be quite weak. You might be with someone, whose financial messes you are thoroughly tired of cleaning up.
It is a myth that spending decisions are made on logical thinking. Oh no, we don’t spend only when we need something for survival. Human spending patterns are not that simple.
We can spend because we are sad or spend because we are angry. We can spend because we are in love, heartbroken or to exact revenge; and for a lot of other so-called therapeutical reasons. All purchase decisions have an emotional element, even when it comes to necessities.
Unexpected change of circumstances
Then there is another category of people I have seen, who have been disciplined savers and prudent spenders for all of their life to date and then one day an unexpected change of circumstances sets off a domino effect of financial damage.
People who have seemingly done all the right things with their personal finances suddenly get into financial difficulty and increase their personal debt as a short term coping mechanism.
Any of these wrecking balls can destroy a house of cards:
- Job loss
- Reduced income e.g. starting a family, caring for aged parents
- Prolonged period of unemployment
- Serious illness or condition resulting in reduced income and increased medical bills
- Death of a spouse or other family member
- Partner with a gambling or drug addiction
- Relationship breakup
- Serious accident resulting in income loss
- Loss or damage to uninsured property e.g. loss of an uninsured home in a fire
- Bad investment involving borrowed money
- Change of economic circumstances e.g. rising interest rates and increased repayments on a loan
- Constant rise in bills without a corresponding rise in income
- Inheriting property with associated debt.
The Illusion of Income
Regardless of how you arrived in your current financial hole, easy credit always looks like the short term solution. The credit card is there already, or it is simple enough to get, so you take it. You know that a 19-20% interest rate is ridiculously high but you are out of options and you convince yourself it is just a short term stop-gap measure until things improve.
Tis the Season to be Reckless
Christmas is of course a time for big spending to show how much we love each other. It’s only in January or February, after the big Xmas splurge and the resulting credit card bill and increasing debt rears its ugly head that we probably realise how much we are overspending.
So What’s the Answer?
Stay tuned, as next month my article will be about how it is possible to get out of debt even though you seem to be falling deeper and deeper into it.
Merry Xmas everyone and here’s to a bright debt free, stress free 2016.
Audrey Dawson CPA and Gary Weigh Licensed Financial Adviser
Change My Fortunes
“Beat that credit card and personal debt and start kicking bigger goals”