It’s always distressing to see people, especially those close to you, experience financial hardship. It’s much more common an issue than most people believe, with 52% of households having nothing to spare from their pay after living expenses, and a quarter of households having no buffer if they were to lose their jobs.
Contrary to popular belief though, income level has some impact but is not the determining factor. Most personal bankruptcies are middle class people, with Professionals (Lawyers, Managers, Doctors etc) on high incomes the fastest growing group.
Why is this?
It comes down to a lack of basic financial understanding. I’ve long advocated that if we want to become a prosperous population, we need to add Financial Education to the national curriculum. It would spread “the wealth secret” within our society:
Spend less than you earn – this is the best financial advice, but most people overestimate what they earn (for instance forget to take out the tax portion of the pay they think they receive, or assume overtime/bonuses will always be there) and underestimate what they spend.
Budget – Do a Budget for all expenses and allow amounts for savings and treating yourself. Then keep track of what you spend, and compare real expenses to what you thought. Having recently talked to several people (high and low income) about what their cars were costing them, it is clear many people have no idea until they tally up all expenses (not just the “regular” fuel and lease costs).
Good versus Bad Debt – many don’t know the difference. A Good Debt is borrowing money to buy quality property or shares that go up in value. Bad debt is any other debt which pays for consumption (credit cards, car loans, “interest free” loans for furniture or electricals, and other consumer items that are virtually worthless the next day). Banks Love people who don’t understand this, and reward them by charging high interest rates on this type of debt. They also lock you into long term arrangements with high break and penalty fees. Whilst I’m generally against excessive Regulation, the Financial Services segment would benefit from Governments forcing these institutions to explain their products better in plain English, and then ensuring the person about to be fleeced confirms that they understand what happens if they default.
Want it NOW – keeping ahead of the Jones’s and our expectation of having all the latest mod-cons now-but-pay-later is a huge issue. Society has been conditioned to think that a new McMansion subsidised by Government grants (which only artificially inflates prices) is a First Home, whereas previous generations saved first and after starting small eventually upsized once they had enough equity. Most Luxury cars sold are leased (yes, there can be tax advantages, which could and probably will disappear one day), which again shows many people are driving around in bad debt beyond what they can actually afford.
Some people experience Hardship through unexpected events like long term sickness. Although some people become rich by luck (whether Lotto or a lucky investment punt), most wealthy people do so through small, consistent steps. There has been a successful trial (supported by both sides of Parliament) by the Department of Social Services of Income Management across 5 sites in Australia where 423 people had part of their Welfare payments quarantined. Over 90% of participants were voluntary, the rest forced onto it. The BasicsCards can only be used for payments of essentials such as food, rent and clothing. There is of course a cost in managing these payments, however the interest in joining this program shows that people are crying out for help in how to better manage their finances to learn and take charge to achieve a better future. Maybe this type of Tough Love forced Budgeting can addre ss many of Societies issues?
As always, onwards and upwards!
Fred Carlsson
General Manager
