INTRODUCTION TO DEALING WITH DEBT
We create debt when our expenses exceed our income. That sounds so obvious. If you Google “what causes debt” it renders 203 million results. If we know what causes it and how to prevent it, why do societies and governments all over the world still get deeper and deeper into debt?
Debt, its causes, how to prevent it and how to get out of it are as old as civilization itself. Many knowledgeable people and businesses teach and provide great resources on how to get out of debt. Even with all these resources available to us, the problem with debt persists and is still increasing.
Part of what exacerbates the problem is the poor and conflicting advice available to those of us trying to deal with debt.
Some organizations such as Dave Ramsey, have the results to prove that they do an amazing and honest job of helping people. There are also many people and organizations that provide poor, conflicting and/or quick fix advice that only benefits themselves. The bottom line is when it comes to your future and your finances; don’t kiss your brain goodbye! Ask questions and look for conflicts of interest in the proposed solutions of those that are offering advice. If they benefit from you getting deeper into debt or from quick-fix solutions that will affect your future negatively, beware and seek a professional second opinion.
I will be discussing the topic of debt in these articles. While I am sure I won’t be able to solve the world’s debt problems with this series of articles, I do hope to have an honest conversation and be helpful to you. I aim to share some of my observations and lessons learned over 12 years of dealing with people’s personal finances in the mortgage business. I am not a debt expert, nor a licensed financial planner. I do, however, have a passion to serve people. I have seen what debt can do to people. I have also observed how people live that are on top of their finances; the difference is remarkable.
I hope you enjoy this three-part series.
PART 1: WHY WE MAKE DEBT
Before we get into how to get out of debt or how to prevent it, let’s look at some reasons why people make debt:
1. A lack of information and/or tools
More than ever before, there is an overwhelming number of tools and information available to help us understand, avoid and pay off debt. So, we know the issue is not a lack of information. Debt, like exercise and weight loss, is a behavioural issue. This means that if we don’t change our behaviour, we will still make debt despite knowing the facts. To deal with the debt we need to change our behaviour. We need to develop a hunger to learn and apply the information available to us.
2. It’s an unfair fight
Debt and lifestyle are the most marketed areas of business in society today. With powerful marketing slogans like, “You’re richer than you think” from respectable financial institutions that we trust to do the best for us, we end up doing what they think is best for us. We fail to realize that these institutions make very large profits from us being deeper and deeper in debt. Their goals are in a conflict of interest with ours and our future. Marketing messages are much stronger than we realize or would like to admit. Combine our never-ending wants, strong lifestyle marketing, easy credit with a disinterest for financial self-education and we have a recipe for an unfair fight. Worst of all, we don’t even recognize we are in a fight or if we do know, we deny it or don’t care about it.
3. Conflict of interest in goals
As I mentioned above, the financial institutions that we trust and seek advice from, earn a major part of their profits from us being in debt. Nowhere else in life would we ask for advice from anyone whose goals are in conflict with ours. But it seems that it is acceptable when it comes to finances. Asking our financial institutions for financial advice is a bit like asking the fox to guard the hen-house; a clear conflict of interest.
4. Poor excuses
Some people might say “I am just not good with money”, or “money is just not my thing”, but does that make sense? Imagine telling the police that you are “just not good at driving between the lines” if they pull you over for distracted driving. Just as we have no choice, but to be good at driving on our roads, we also have no option but to be at least proficient with our finances. It is essential; our futures depend on it.
5. Personal development
So many of us don’t invest in ourselves and our own personal skills. The best, guaranteed investment that you can ever make is in you and your future. Take responsibility for your financial training and immerse yourself with good content.
6. Money does not have an address
In other words, we don’t have a budget. Our budget tells us what to do with the money; it gives the money an address. Dave Ramsey says; if you don’t tell your money where to go it will leave. Although budgeting is not sexy, it is essential and you need to have one and stick to it.
7. Our systems are not automated
Whatever is not automated and we have to do manually in the midst of our busy lives, will inevitably not get done. This is how people end up not investing their money. Instead, spending it on stuff they don’t need to impress people they don’t know and don’t care about.
8. Debt is culturally acceptable
In 2017, Canada’s debt as a nation was 67.5% of our economy. To put this in context; to get a mortgage, the Canadian government does not allow us to spend more than 44% of our gross income on debt and home expenses. Yet the very government that mandates the mortgage rules, won’t qualify for a mortgage under its own rules. When I was a kid, I often only obeyed and followed what my parents did, not what they told me to do but did not do themselves. Not “practicing what you preach” has a significant effect on Canadian citizens and our comfort with debt.
9. Common sense at a premium
The messaging about debt has been confusing, to say the least. Some people have a hidden agenda for their advice. Others differentiate between “good” and “bad” debts. Some advocate for “0%” loans while others sell debt leveraging as wealth building solutions. With all this conflicting information from the “experts”, how is it possible for someone who is not in the financial industry to know what to do? It seems that the common sense that debt limits our lives and should be avoided as much as possible, evades us. While some debts might be unavoidable, especially when it comes to buying a home in Canada, we need to understand that all debt makes the borrower subject to control from the lender.
10. It might be an income issue
I recommend that everyone should work with someone else -a third party -on their finances. Someone trustworthy and honest who has your best interests at heart. This brings safety and reality to our budgets and it brings us unemotional and unbiased opinions about where we are at. Once you have completed your budget, you might discover that your expenses are realistic and reasonable and you have an income problem. This might prompt you to improve your skills so you can earn a higher income, or you might embark on a new job/career search or a career change.
11. Everyone is not on the same page
In most families, one person is typically a saver and the other a spender. One person likes planning and admin, while the other delegates their responsibilities to their partner without getting involved. This can often have a negative effect on your finances. Not being on the same page about expenses and income, will most likely cause you to overspend and create debt.
12. Catastrophic events
If we don’t have an emergency fund for unexpected expenses, such as a car breaking down or medical expenses, it will cause us to use credit to pay for the expense. This is often the start of a debt spiral that takes us a very long time to recover from.
This is definitely not an exhaustive list of all factors that cause debt. All the items will also not be applicable to all circumstances. The above list nor any of the content in these articles should be seen as judgement or prejudice against anyone who has debt.
On the contrary, I created these articles out of empathy and care for those who are caught and trapped in debt and don’t seem to be able to get out of it or get unbiased advice. I try to be honest and speak plainly, but only because I do not want to be unambiguous. I hope you see the content in the light and spirit that I intended.
This was Part One of our three-part, “Dealing with Debt” series.
Be sure to read Part 2, How to pay off debt and become debt free here and Part 3, How to stay out of debt and remain debt free here.
You can also find the specifics of our debt snowball plan here.
Feel free to give us feedback below.