You have debts? Then, you are in good company because we all have some debts. Some have more debts than others. I was shocked when Bank of Canada released the news that the Canadians owed $1.821 trillion in debt by end of 2017. Jesus! What did we do with this money? Buy another country? If we did, hopefully a warm place.
As for my American neighbours, you are also in debts. Granted, there are 325.7 million of you compare to a merely 36.3 million Canadians. You can totally crush us by just sheer numbers. According to the Federal Reserve Bank of New York’s Center for Microeconomic Data, the American total household debt ended with an all-time high of $13.15 trillion at end of 2017. To make the matter worse, the report indicated that American had 5 consecutive years of annual household debt growth. Sorry to be the bearer of bad news.
But if you think that debt is a North American issue, then you are mistaken. The South Koreans, the Scandinavians, the Australians and lastly the big cheese, the Chinese are heading toward the same direction. Yes, a Bloomberg’s report on February 2018 indicated that the debt burden for Chinese consumers nearly tripled in the past decade. The cupid of Chinese personal debt is the exponential rise in very cost of real estate and they also have acquired taste for finer things in life.
All this to say: you are not alone in the debt-ridden path so don’t beat yourself up. The important questions that need to discuss are: why the personal debt increase so much and so did quickly? Why did we get into debts? How can we get out of debt fast? Lastly, how can we stay on debt free path and not letting it impact our mental state? Debts can seriously impact your mental health because the financial burden is one of the leading causes for depression and stress, so it should be properly managed.
10 causes of personal debts
I am a firm believer that until you truly understand the root cause of the problem, you won’t be able to fix the issue entirely. So, to solve for debts consolation effectively, we need to examine why people get into debts in the first place.
1 – Credit, thy name is deceiving
I have a friend who is more of budget hawk and debt hater than I am. I know, you can’t believe it right? But it is possible, and she exists. For a while, she thought she was debt free until I busted her bubbles. Yes, I wasn’t always considerate and somewhat of a smart-ass sometime. Once, this friend proudly told me that she had no debt. She was good about debt management because she rented and paid off all her student debts. I asked her: “Do you have credit card?” She replied: “Yes, off course I do. Who won’t have credit card these days”. “Well, my love! I have news for you. You have debt. Maybe a small amount, but you do. It is called credit for a reason”, I told her.
Admittedly I sounded like a tight-ass banker, but I was right. The beauty of digital banking world is convenience of usage but it comes with a cost. Credit cards make it very easy for people to get into debts so it is not a coincidence that personal debt ratio has been on the rise for first world countries and some emerging markets where credit card usage is now a way of life. We are conditioned to think of that piece of plastic as a charge card not a short term (mostly 21 days) debt. I have news for you, it is debt and it is a very deceiving one that can get you into deep trouble with a capital “T”.
In addition to ease of usage, there is also a long list of services, benefits and prestige that the growing list of elite card products entice into the spending trap. Yes, you know that I am talking about. It is black, sexy and expensive looking. And they have very catchy names.
The credit card product owners and marketers are great at making the plastic sounds sexy. Eurasian Diamond Card Visa Infinite, Citi Ultima MasterCard, BMO World Elite, American Express Centurion, and CIBC Imperial Service black card. The Canadians know what I am talking about. Who won’t feel important when you have a CIBC Imperial Service black card service? It says: I arrive! I made it! I am rich!
Carrying these types of Elite cards make us feel important because they are symbol status. I am guilty of this too. I have an Elite travel MasterCard that I use extensively and have been hooked on this card because it gives me free access to airport lounge and other perks when I travel. If you travel with a young child (say, a little mini-me) an airport lounge is a life saver because it has comfortable chair and decent foods to feed and occupy your child while you wait for take-off.
Credit card companies have many years of experience, knowledge and talents to exploit consumer’s psychology and they do it well. I came across many customers who were just dumbfounded by how they got into so much financial trouble due to usage of credit cards. In my opinion, credit card can be very dangerous for debt management because people are condition to believe that it is not a debt when it is truly a revolving door of debt.
Credit card is structured as a revolving debt instrument which means, as you pay off the balance, you can instantly re-borrow. The minimum payment feature is the worst one for consumers who are careless and or the spenders. Yes, I am talking about people who just sign the credit card agreement without reading it and the folks who just can’t stop themselves from buying that nice designer bag (my sister included). Do you know that a merely $2,000 credit balance with an 18% annual rate, a minimum payment of 2% of the balance or $10 (whichever is greater) would take almost 31 years (370 months) to payoff completely? Get ready for the worst news: based on this, you would pay $4,931 in interest and charges which would be 146% more than the original $2000 you borrow. I will stop my credit card lecture here. You know this is bad stuff.
I know the allure and dangerous of credit card because I used to run a credit card portfolio. To be fair, credit card in responsible hands can facilitate money movements very effectively and save you a lot of time. And it is almost a necessary in the modern world that can make our lives a lot easier. But in irresponsible spending hands, it will mean debts, credit history damage and stress. So, think carefully before you tap, swipe or insert that plastic. It is money out of your wallet even when you don’t see it.
2 – Medical expenses
Medical costs have long been one of the leading causes of bankruptcy for my American neighbour. Though Canadians have universal health care, illness, injury, or health condition can incur debts as the person is able to work and generate income. So, unexpected and large medical bill can get you into debt very quickly and it is unavoidable.
3 – Job or income loss
Losing your source of income can severely hurt you financially. When you lose your income, it’s easy to find yourself overwhelmed by bills and expenses. Debt can quickly follow. I came across endless stories of people lost their jobs or their businesses went south and they ended up with lot of credit card and line of credit debts. By the time they gained decent income and wanted to tackle the debt, the banks refused to lend them money because their credit records were tarnished by then.
4 – Student debts
Education is costly but it is the necessary investment so we often saddled with debt early on in our lives. If you decide to pursuit a post graduate degree, it will cost you even more. With the competitive global market, the demand for higher skills increases and thus we will likely see higher increase in student debts for the next generations.
5 – An unexpected emergency
Many people find themselves in debt because they aren’t prepared when big, bad, expensive things happened to them. I experienced this first hand when I purchased my 2nd home. Three months into the new house and my pipe busted costing me $9000 to fix all the water damage. Yes, I pissed off the water god and he busted my pipe.
6 – Not enough or no insurance
Apart from health insurance (which is very important for American folks) there are many types of insurances that can be used for financial planning. To this day, my mother still refuses to buy critical illness insurance because she is afraid that maybe a cure for her dying sooner or having cancer.
Just a quick explanation, critical illness is insurance policy that has a lump sum payout to you if you have cancer, stroke and heart disease. I will write an article on all insurance products. Promise! Getting back to this discussion with my mother, I explained the concept of insurance to her and I assured her that the insurance man would be praying to the insurance gods (also known as the actuary. Yes, they are the insurance gods) every day that she won’t have cancer, stroke or heart attack because he won’t want to pay her out.
“Well, then insurance is a waste of money. I don’t want to be sick and they don’t want to pay, so why buy it?” she said. Well, it can seem to be a wasted of money until you need it that is, mother! Imagine that you get the bad news from your doctor and you have no money to afford expensive treatment, a lump sum payout from a critical illness policy can be a life saver. This is just one example, I came across many customers found themselves in serious debt or even bankruptcy when a bad event occurred and they were uninsured, underinsured or didn’t have enough savings.
My mother wasn’t pleased when I ran the insurance portfolio. She still believes insurance is a scam. She is not alone, many consumers do because insurance is a weird and perplex financial planning product that you should have but don’t ever want to use it. But if use effectively, insurance can be a relatively inexpensive option to provide financial coverage for your loved one or even yourself when unforeseen event or disaster strikes.
7 – Keeping up with the Joneses
In my experience (and quite a few academic researches agreed) that keeping up with the Joneses is one of the top reasons for people getting themselves in web of debts. Our culture teaches us that we deserve more and better things, and so you may feel pressure to “keep up” with your friends’ lavish lifestyles. A lot of people fall into this trap, and get into serious financial troubles because they want to maintain an image in society. We can spend hours talking about the deep psychological issues that causing someone to feel that they need to keep up an image to feel accepted or important. But the bottom line is: living beyond your means to keep up an image will hurt you and your family in the long run, so don’t go there.
8 – Divorce
If you think the wedding bill (especially an Asian wedding of 10 course meals for 300 relatives and friends) is astronomical, then take a look at the divorce bill and it will get your blood pressure rise even more. When a marriage ends, it can be financially disastrous for both sides if the divorce is a nasty one.
Divorce means that each person is going from two combined incomes to one. If you earn less, then you will get the short end of the divorce stick. Now, you have to acclimatize to lower income after having higher disposable income for years. It is a shock for your system on top of the mental stress and heartbreak. Alimony and support payments can be detrimental to one’s finance and are all expected cost of a divorce. So it is not surprising that people tend to get into debts as a result of a divorce.
9 – Gambling
Vegas is built and still thrived on this industry. Gambling disorder can seriously hurt your finance and destroy the relationship you have with family and friends.
10 – The rise in real estate
My friends often said to me that I own three homes. I always corrected them that the banks owned 75% of these houses for the next 20 years. Will see how much of the houses I will own at the end of my mortgage amortization. Yes, the biggest debt for most of us is mortgage. As the cost of real estate rise, we will get into more debts.
I will end the first part of debt consolidation here. In part II, I will discuss what steps you can take to prevent yourselves from getting into debt. Talk to you soon!