What Causes Financial Trouble?




We are not the best when it comes to making wise selections regarding our spending habits because we are human beings with all the human emotions. Free debt, credit cards, peer pressure, and our own behaviours are just a few of the causes why most of us will run into financial difficulties at some point.


Most of the models that predict performance and earnings fail to factor in human nature. We are not robots. When the market crashes, we panic! When we see a sale, we buy. And as a result, we encounter financial problems more easily than we might predict.


Lets take a look at some financial behaviour pitfalls that get us into financial trouble:


Financial Illiteracy


A survey showed that many if us lack basic financial literacy. Without basic financial literacy (such as understanding inflation, compound interest, time value of money) it is difficult to truly understand its impact on our everyday life.


Those with lower financial knowledge are less likely to save. And the reason for that is that they don’t understand the long-term impact of the decisions they’re making today. They experience financial stress more easily and don’t know (or understand) how to take advantage of many mechanisms that help us to save money.


Hence, we must be careful of assuming that someone who is in financial trouble after racking up a lot of debt was greedy or had no self-control. Sometimes that’s the case, but often they might just not have fully understood what they were doing.


Overconsumption


We continue to spend a growing portion of our income on living expenditures. The fact that prices are rising (inflation) doesn't help, but there are other factors at play. It is referred to as lifestyle creep - this refers to how our spend on non-essential items increases as our standard of living improves.


As we get pay increases, promotions, bonuses etc. we tend to focus on increasing what we think is our quality of life (we think more things will make us happy) as opposed to saving more or paying down debt. By spending money we end up adding further complication and money problems to our lives. And sadly, these complications are often the root of deep financial trouble and anxiety when things don’t go the way we thought they would. Often, we feel like we can’t catch a break because we’ve allowed the wrong things to take over.


Insufficient Savings


If you combine financial illiteracy and overconsumption, you eventually reach a point where you realise you have insufficient savings. The scary thing about this is that you often don’t realise it’s happening to you until it’s too late.


There are two problems here, 1) you don’t save at all, or 2) you do save, but it might not be enough. If you’re young and reading this and think this is something applicable to your later years, you’re wrong – it’s applicable from the moment you start earning any income. Financial trouble can creep up on you very easily.


Saving a little is better than saving nothing. So even if you feel like you don’t have much to spare, starting small is fine. The power of compound interest is incredible. It will reward you for your discipline.


If you are saving, consider whether it’s enough. For some of you, it might legitimately be the max you can save. For that – I commend you. For others – you know you’re victim to lifestyle creep, you know you spend too much and you know you could save more if you really had to.

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