Thursday, 1 December 2011

Financially Illiterate: What is Wrong With Us?

Did anyone notice a slew of new shows on television surrounding debt reduction in the past few years? Were people always this terrible with money or is it a new thing? Our parents grew up thinking you were supposed to have the money in the bank before you purchased something with the exception of a car and a house. Some of our grandparents grew up not ever needing a loan. They paid for everything with cash and stored it in a mattress. We don’t have that option anymore. Not ever having any debt or credit to pay off is actually a hindrance now. Try getting a loan from the bank for a house without any actual credit history…go ahead, I’ll wait.

Our current problem is the availability of credit regardless of how irresponsible we are. You have to get into real trouble before people stop giving you the opportunity to destroy yourself financially. Much like our obesity problem, we have issues with short-term and long-term results. Instant gratification generally overrides long-term goals. This can be corrected by changing the way we socialize with each other around the topic of money.

How Do We Counteract The Purchase High?

We need to assign some non-financial accountability to purchases. Apparently, it’s taboo to talk about money with anyone but your spouse. If you’re single, no one even knows you’re financially retarded unless you have to ask them for money. We’re not allowed to ask people how much they make or how much they spend on things. This is what we need to change. We get the instant gratification from purchasing something we can’t afford, and the additional gratification of having other people compliment us on our things. The messy business of severe debt doesn’t become a problem for at least a month, if not longer.

Example: When you walk into someone’s newly constructed home and see a large flat screen mounted on the wall with brand new furniture being dusted by a cleaning service, we automatically think “Hey, this guy doesn't really make a lot of money. I am super impressed that he has these things.” Instead of “Hey, this idiot makes minimum wage, what the hell is wrong with him?”

Then we ask them questions like “how big is that TV?” and “What’s the definition on that?”

Then they reply with all of the enthusiasm of someone who’s cured cancer.

“65 inches” and “it’s a new form of HD that’s actually clearer than real life.”

He has now been rewarded for his irresponsible behaviour.

Changing the way we talk about money will make this guy think before he makes a purchase like this. His current thought process can be mapped out as follows:

Step 1: I would like a big TV

Step 2: Decision made, TV purchased. I’m gonna watch Nickelback videos on it as soon as I get home.

Next time you see a TV this size ask “How much did that cost?” and “How did you pay for it?” and “How long until it’s paid off?” This will eliminate any positive feelings this person had about his purchase unless he purchased it responsibly. He will respond “way too much” and “well I put it on my credit card” and “probably never as I always carry a balance on my card” or “I’m leasing to own it. I only end up paying three times as much as it costs.” Don’t worry about offending or embarrassing these people. They need it. You’re helping!

Look at his new thought process after we fix the way we think about money.

Step1: I would like a big TV

Step 2: How stupid am I going to look when people ask me about the price and they compare it to my income and debt level?

Step 3: Math

Step 4: Frowny-face

When people walk into my apartment and see my mismatched furniture and tiny entertainment system, they think “Oh look at the little twenty-something with his little tv/dvd player combo…adorable.” Instead of “Wow, I bet that guy has a credit card with a zero balance.”…then of course they would see the shoe boxes and tie collection and those thoughts would dissipate.

This shouldn’t be merely related to purchases either. We should be able to ask people how much they’re putting in their retirement funds and savings accounts for trips and toys. It’s going to be uncomfortable at first, but I think we can do this. Imagine if someone had been able to ask your parents how much they were putting away for your college fund. If the accountability aspect doesn't do it, the shame of admitting to their friends that even though they can afford it, they’re not planning on supporting their child’s post-secondary education could result in a lot of new accounts being opened. 

I know a lot of you think that educating people on their personal finances would solve these problems, but convincing them to save money takes more than showing them what they will have accumulated in 25 to 30 years. It's not that we don't know it's good to save money, we just don't care. Remember, guilt and shame are more powerful than education.

1 comment:

  1. I, for one, enjoy your mis-matched furniture, despite the tiny shiney hairs the couch sheds. It's all good.
    These are very interesting thought processes- people should take more time to think about their purchases before they whip out their card and start swiping away. Around this time of year can be hard for some who have no self-control..or at least control over their spending. I am happy to say I am getting a handle on mine! Thanks to a few of your pointers :P