There are a number of personal finance personalities, especially on American radio and TV, who say that if you have too much debt it’s because you spent too much and you're the cause. After all, if you're actions aren't to blame, then they can't sell you their solutions and books.
But is that opinion valid? Are all of our financial problems entirely our fault, or are there other factors that lead to debt problems? On today's show we talk about how circumstances can overtake anyone.
As Robert Brown put it:
There may be times when somebody's taken on a awful lot of debt for irresponsible decisions ... But it's also true that life will come up and bite you in the butt if you will ... rather than placing blame look where responsibility lies and the even larger lesson is learning when these things happen and then taking steps to make sure that they don’t happen again.
I ask Robert Brown and Kelley Keehn for their opinions, and they both agree that we should bear some personal responsibility for our actions, but there are also circumstances that are beyond our control that lead to debt problems. Yes we should prepare for those circumstances with thing like emergency funds but sometimes, even if you do everything right, stuff happens and you end up deeply in debt.
5 Reasons Why Debt Is Not Entirely Your Fault
Based on a review of all of the people I’ve helped with debt problems over the years, I can easily list five common reasons why your debt problems are not entirely your fault.
1. Aggressive and sophisticated marketing
Big banks and lending institutions have big marketing budgets. One of the most aggressive, and often effective, market activity is direct solicitation. Financial institutions of all types send preapproved credit applications in the mail. Your current lender may notify you that they have automatically increased your credit limit without you even asking. Walk into almost any major store and there is likely a friendly person at the front asking if you want to apply for their credit card in exchange for a free gift. These are all common tactics, and can be difficult to resist.
Payday loan companies don't advertise up front that their loan carries an interest rate of 548% - they say it's $21 per $100 borrowed because that sounds better. Couple this with a convenient and friendly in-store experience and you can see why payday loans are so popular.
All of this means we have easy access to credit. And as Kelley Keehn explained:
not just access, easy access. And cheap money ... instead of saying I can't afford that, they look at well, you know my line of credit, if I just service it with that interest ... They're looking at servicing a line of credit. Not getting out of debt.
Kelley also talks about how peer pressure to spend adds to our tendency to take on this credit and minimum payments make us think we can afford it.
2. Job Loss or Underemployment
According to our Joe Debtor study, more than half of all of the bankruptcies and consumer proposals filed in Canada are caused primarily be a reduction in income, and in many cases that’s caused by job loss. If you lose your job it is often inevitable that you use debt to survive until you find another job. So what should you do? Again, as Robert Brown discussed control what you can and don't beat yourself up for what you can't:
we don’t have any control over the economy or the price of oil or any of those things, but we do have control to a large degree over our personal economies... it's certainly better to lose your job with no debt
Illness, injury, and health related problems are the cause of 15% of insolvencies filed with Hoyes Michalos. If you have a full health plan at work you may be able to afford your medications, but it is often the time off work, with reduced or no pay, that causes people to resort to debt to survive.
One in five insolvencies in Canada are caused, at least in part, by a relationship breakdown, separation or divorce. More than a quarter of people filing bankruptcy are divorced or separated at the time they file.
We can debate whether or not it’s your fault that you got divorced, but separation definitely comes with financial costs that can lead to more debt:
- you are no longer sharing expenses including your home and car;
- living costs double on roughly the same combined income;
- you incur extra costs to move, perhaps sell a home; and
- legal costs can add to debt, particularly if children are involved;
Could you survive a separation tomorrow? Do you have sufficient resources to start a new life? Many people don’t, and it’s not their fault.
5. Student Loans
More than one in ten (13%) people who filed insolvency in Canada had student loan debt.
The cost of getting a higher education for most young people today is massive student debt. It's almost impossible for a student to earn enough money during the summer or with a part time job to cover tuition, residence, books and all the other costs of going to school. Is that student debt your fault?
The takeaway from today's show is that yes we need to each be responsible for our debt and money choices however sometimes events happen that are on your control and can lead to financial problems. In those situations, rather than laying blame, look for a solution for a future. In other words:
Don't find faults. Find fixes.
Read the show transcript below.
Resources Mentioned In The Show
FULL TRANSCRIPT show #80 with Robert Brown and Kelly Keehn
Today on Debt Free in 30 I want to discuss a simple question, 'Whose fault is it?' That's the question, whose fault is it if you're in debt? There are a number of personal finance experts, many of whom are American and have their own radio or televisions shows and they write lots of books that say if you have too much debt it's because you spent too much. If you can't find a good job it's because you aren’t looking hard enough. If you don’t retire by age 50, it's because you didn’t save enough and invest wisely.
Now I question their opinions because obviously they make their money by selling books and DVDs and webinars and courses to tell you how to get out of debt and manage your money. So, if they can convince you that it's your fault, they can sell you their solution. If it's not your fault well then they can't sell you anything.
In my experience, our Canadian personal finance experts are somewhat more realistic. They understand that into each life some rain must fall and sometimes stuff happens that's beyond our control. A few weeks ago I had Robert Brown as a guest on this show, he's the author of Wealthing like Rabbits, which is a great book that is an unconventional look at personal finance. So, I wanted to hear his opinion so I asked him, is it my fault if circumstances come up and bite me?
Robert Brown: Sure, I think it's largely circumstantial and situational. There may be times when somebody's taken on a awful lot of debt for irresponsible decisions and if we need to place blame that person needs to look in the mirror and accept some for himself. But it's also true that sometimes life will come up and bite you in the butt if you will. You could lose your job or you could be faced with a large bill because your car blew up that you weren’t expecting. And personal finance types like me can talk about emergency funds and all those sort of things but life sometimes happens and it's not always your fault. I think a better lesson is rather than placing blame is looking where responsibility lies and the even larger lesson is learning when these things happen and then taking steps to make sure that they don’t happen again.
Doug Hoyes: 'Cause I know that in my business we're very busy in January, February March, April as people get all their Christmas bills, holiday bills start coming in. And there's a bit of a spike in our business at that time. And I always say to myself well, okay people we always know when Christmas is going to be. You tell me any year a thousand years in the future and I can tell you what date it's going to be, December 25th. And if you always go out for your birthday well, tell me what your birthday is and I'll tell you what your birthday's going to be two years from now, it never changes it. You talked about a car blowing up; okay we've all had that happen.
Robert Brown: It probably wasn’t the best example.
Doug Hoyes: Well, but it was a good example because in my business a lot of people get into trouble. They tell me yeah everything was going goo and then the transmission died and I had to get another transmission. Well, you can predict that a car will need repairs. You can't predict the exact date but if you have a 10 year old car at some point it's going to need new tires, new breaks, new this, new that.
Robert Brown: You can plan for car maintenance, absolutely you can.
Doug Hoyes: So, is it my fault then when my car eventually does break down? Shouldn't I have known about that in advance?
Robert Brown: Yeah, you know what? It's a tough call but people need do I suppose a better job of planning for life, that's why I come back to personal finance types like me will talk about having emergency funds set aside for when that type of thing happens. And, you know, when we look at all the sorts of stuff that are happening in the economy today, there are some people going through some tough times and there's some jobs being lost. And I am completely empathetic to those situations.
But in my back of my personal finance mind I'm always asking myself, okay it wasn’t, you know, we don’t have any control over the economy or the price of oil or any of those things, but we do have control to a large degree over our personal economies. And if you were to lose your job, you know, that's never a good thing but it's certainly better to lose your job with no debt and, I'm pulling this number out of my head, $10,000 in the bank, then it is to lose your job with $15,000 in credit card debt and no money in the bank. And those are things that we can learn from other people's experiences or from our own experiences and set ourselves up for the future a little bit better.
Doug Hoyes: So, you're saying I should control what I can.
Robert Brown: Yes.
Doug Hoyes: And I guess by extension not beat myself up for things I can't control.
Robert Brown: Perfect.
Doug Hoyes: So, if my company shuts down and moves production overseas, well okay, maybe I should have worked harder but let's face it there were 4,000 people in the plant, my working harder wouldn’t have changed the outcome, that's what was going to happen.
Robert Brown: But you do have control over your personal economy for when that happens, whether or not you were in debt, how you managed your money up to that moment.
Doug Hoyes: And so, I guess stress testing your finances is not a bad idea then. So, if I was to lose my job then what would happen, how would that change my behaviour today? And I mean you've probably heard the same stories, I've heard about people in the oil patch in Alberta in 2013, 14, 15, they were driving big trucks and living in nice houses and that but they all had, well I shouldn’t say all, some of them had debt. And so, when the inevitable happened and the oil price dropped, well if you have no debt okay well I guess it's going to hurt, I'm going to have to find another job, maybe I'm going to have to move out of Alberta.
Robert Brown: But it won't hurt as much as for somebody who has a big credit card debt and a big truck loan they need to pay off.
Doug Hoyes: Absolutely. So, you've got to look ahead and see what's coming and control what you can and don’t beat yourself up over the rest, excellent.
Robert Brown: Plan for the worst, and how's that go? Plan for the worse and expect the best.
Doug Hoyes: Hope for the best, yeah something like that. So, that's a good way to end the segment, Robert thanks very much for being here.
Robert Brown: Thanks for having me Doug.
Doug Hoyes: So, Robert touched on a number of different concepts. He agrees there are a number of circumstances outside of our control, if you can't control if you can't control it, it's as simple as that. But what Robert also said is that while we can't control the economy, we have some control over our personal economy. We don’t know when our car will need repairs, but since no car will last forever we can plan for the inevitable repairs. So, what's the answer to the question, whose fault is it? It would appear that in some cases we have some control over our fate and in other cases circumstances are beyond our control.
So, let's ask another expert for their opinion.
I'm joined by Kelly Keehn who was on the show awhile back talking about identity theft and fraud. I want to ask you a different question though Kelly, and that is is my financial problems my fault? And I understand that at the basic level, yes I spent the money that's what created the debt, so yes, on some level it's my fault. But there are also forces at work here. Is it 100% my fault? Are there other things that factor into it when you think about is it my fault that I'm in the situation I'm in?
Kelly Keehn: Yeah, there's certainly a number of different factors. But one that I don’t think a lot of us think about is, 20 years ago I used to hear my friends say and peers and co-workers and things of that sort say I can't afford that. Now they were doing a quick calculation in their head, you know, based on my mortgage payment and put something in RSP and saving for the kids, yeah, no, I can't afford that right now. So, it wasn’t that they truly couldn’t but their calculation was that they couldn’t afford it.
20 years fast forward, I don’t hear anyone ever, any income level, as a personal finance educator, people will write me for help and then when I offer it or give them a free call, they're on a vacation in Hawaii or Mexico and they'll get back to me in a couple of weeks. No, the expectation is you have to have two cars, you have to buy a home, you have to put your kids in this and all of that. And no one stands back and says I can't afford it. So, when you have that kind of adult peer pressure to be the one to stand back and say to your kids we can't afford that, to say to your friends, I can't afford that, it's just not even in our vernacular. So, I think that's one of those that have absolutely has influenced us over the last number of decades.
Doug Hoyes: Yeah, I mean if everybody you know in your community wears a blue shirt and you tell your kids no, you have to wear a green shirt, I'm totally different, I'm totally different than anyone else.
Kelly Keehn: Exactly.
Doug Hoyes: And so, it's a budgetary question then. In the past we would look at our budget in our head if not on a piece paper and say no, I can't afford that because that will mean I won't have the money to put in my RSP to save for my kid's education, whatever. And now we don’t even think of that because we have access to credit?
Kelly Keehn: Well, not just access, easy access. And cheap money as people tell me. So one of the first principles of economics is 'incentives drives behaviour'. So, I was the host of a show a number of years ago called Burn My Mortgage that's re-running right now on OWN actually. And I got to tell you I'm 40 right now, I think I was 35 when it ran I had never heard of a mortgage burning party. It was not -
Doug Hoyes: Not even a thing.
Kelly Keehn: Not even a thing. It's not anything anyone's talking about. Actually my generation and younger generations are like well just debt is what it is. And people, instead of saying I can't afford that, they look at well, you know my line of credit, if I just service it with that interest that's like $75 a month, sure we can do the kitchen renovation with the marble and everything. Yeah, you bet. They're looking at servicing a line of credit. Not like getting out of debt, paying for your kids education, do, do, do, do. So, it's like -
Doug Hoyes: So, today afford it means I can make the minimum payments.
Kelly Keehn: I think for a lot of people it does.
Doug Hoyes: So long as interest rates stay close to zero then -
Kelly Keehn: And you have your job and your spouse has his job.
Doug Hoyes: Everything's perfect.
Kelly Keehn: Right.
Doug Hoyes: So, to a certain extent it's not our fault because we've all got sucked into this mentality that yeah, I can get everything because credit is easy, I can get at it and that's what outs there. Well, that's an excellent answer and I think that's a good thinking point for all of us that when we look at whether I'm responsible or not for something it's not just the banks that are pushing me that's how they make money, but also my peers are pushing me. I've got to look at both factors.
Kelly Keehn: Exactly. It might not be your fault but with your new awareness it's within your control to change so be empowered with that.
Doug Hoyes: And make sure you understand it. Excellent, that's a great answer. Thanks very much Kelley.
Kelly made some great points. She said that incentives drive behaviour so when interest rates are low it drives us to borrow more than we would borrow if interest rates were higher. You can see that quiet clearly in the housing market. When the federal government wants to stimulate the economy they lower interest rates so we can all afford to buy an even bigger house. Low interest rates lead to lower mortgage payments so I can qualify for a higher mortgage so we buy more expensive houses, which just drives house prices up. So, is that my fault?
Kelly also made a great point about our perceptions. 20 years ago if I said I can't afford it, it meant I don’t want to use up too much of my budget by buying that thing. Today in this era of low interest rates and easy credit, afford it means I can make the minimum payments. That's a totally different definition of afford it.
We live in a time of historically low interest rates. Government guaranteed mortgages, which encourage us to borrow and easy credit. So, we borrow and that sometimes lead to trouble. Are low interest rates and easy credit our fault? Kelly's right, it might not be your fault but it's within your power to decide whether or not you take out that bigger mortgage. But it takes a lot of discipline to not borrow when it seems like everyone else around you is borrowing like crazy.
So, we've heard from two experts and they both offered a similar opinion. Sometimes circumstances are beyond our control so it's not our fault if we get into trouble. But we also should be aware of what can go wrong and we should take steps to prepare for possible problems. So, what can go wrong?
Well, based on a review of all the people I've helped with debt problems over the years, I can easily list five common reasons why your debt problems are not entirely your fault. Number one, aggressive and sophisticated marketing. All you got to do is a do a quick review of all the big banks financial statements and you can see that each year they spend many hundreds of millions of dollars on marketing, what they call communications. And that's television and radio commercials, internet ad advertising but of course that's not the most difficult advertising to resist. You can always change the channel or hit the mute button.
The most insidious form of advertising is direct solicitation. Have you ever received a pre-approved credit card in the mail? Has your credit card company ever sent you a letter saying congratulations, you didn’t ask for it but we raised your credit limit. Have you ever walked into a store and the friendly person at the front says hey if you apply for our credit card today you get a free gift? These are all common tactics and they're very difficult to resist.
Payday loan companies, we've talked about them many times on this show and they are very sophisticated. They don’t tell you our annual interest is over 500% so you may never be able to pay us off. No, instead they're only going to tell you things like it only costs $21 to borrow $100. That doesn’t sound like much but if you do the math, borrowing $21 on, oh sorry, paying $21, on a $100 loan every two weeks works out to $548% interest on an annual basis each year. It's hard to resist these sophisticated marketing tactics and that's why if you do succumb to the temptation, it's not entirely your fault.
The second cause of a lot of financial problems is job loss or under employment. More than half of all of the bankruptcies and consumer proposals filed in Canada are caused primarily by a reduction in income and in many cases that's caused by job loss. Is it your fault that your company moved operations to Mexico or China? Probably not. An equally common scenario is underemployment, many companies offer full-time permanent employees medical benefits and a retirement plan. That's expensive so companies today may hire a couple of part-time employees instead of one full-time employee.
The savings are significant for the company but of course the cost to the employee is potentially huge. Many employees must have two or more part-time jobs just to make ends meet and they have to juggle their shifts to pick up enough hours just to survive. If they get sick, forget it, there's no benefits and they incur the costs. Is it their fault that they have to use debt to survive?
Temporary jobs are another big risk factor for employees. To hire a full-time employee, an employer has to interview multiple candidates, pick the best one, set them up on payroll and then if they're not suitable for the job they terminate them and incur the cost of severance, and incur the cost to hire a replacement employee. That's why more and more employers today are using temp agencies for clerical or manufacturing or service industry employees. They've got an unlimited supply of employees and if they don’t work out they can terminate them with no cost and get another one tomorrow. No severance and no benefits. I know of one large employer where the majority of the work force is temporary employees on short-term contracts. I've met with many employees at that company who've worked at that company off and on for seven years. But they're still contract employees with no benefits. They go through periods of unemployment until the next contract starts and they use debt to survive. Is it their fault that they can't find a full-time permanent job with benefits?
Number three, number three cause of financial problems, illness. What would happen if you were in a car accident or got injured at work or found out you had cancer and required six months off for radiation and chemotherapy? Do you have enough money in the bank that you could pay your rent or mortgage and food and prescriptions and all of your other living costs for the six months that you'll be off work? Most people don’t have six months of cash just sitting there, so a medical problem can be financially ruinous. So, is it your fault if you get cancer?
Number four, divorce. Based on our statistics one in five insolvencies in Canada are caused, at least in part, by a relationship breakdown or separation or divorce. More than a quarter of people filing bankruptcy are divorced or separated at the time they file. Now we can debate whether or not you get divorced but there is no debate over the financial implications of a relationship breakup. When you're together you have one expense each month for rent, hydro, gas, cable and home phone. You may even be able to share a car. It's not quite true that two can live as cheaply as one but it's pretty close. When you separate you are each now paying rent and all your other living expenses. Your living costs can double but unfortunately you now only have one income and of course that's a recipe for financial problems. Lower income, higher expenses.
In many cases the actual separation itself is also very expensive. You incur costs to move and you need first and last month's rent and a security deposit for your utilities. If you don’t have the cash on hand you borrow to start your new life. If a legal separation is required lawyers may be involved, if children are involved the lawyers bills can be significant and that leads to more borrowing. Could you survive a separation tomorrow? Do you have sufficient resources to start a new life? Many people don’t and it's not their fault.
Reason number five, student loans. More than 13% of all insolvent debtors in Canada had a student loan at the time they filed for bankruptcy or a consumer proposal. And 13% is actually a pretty big number because in Canada a student loan only automatically gets discharged or goes away in a bankruptcy or a consumer proposal if you've been out of school for more than seven years. So, it's not like you can graduate and then go bankrupt the next day and get rid of your student loan. If you've got a student loan at the time of your bankruptcy and that's the reason you're going bankrupt you've been struggling with it for a long, long time.
When I went to university in the 1980s, tuition was low, maybe around $1,000 a year. So, a student like me could get a summer job earning minimum wage and I could earn enough to cover tuition and books. If your parents could cover your living expenses you could complete a four year program without the need to resort to student loans to fund your higher education.
Today, totally different story, a typical undergraduate program at a typical Canadian university will have tuition starting at around $6,000 a year and a more specific program can easily have annual tuition of $10,000 or more. You add in the cost of books and other fees and living expenses and a year of post-secondary education can easily cost $20,000 or more. Well, how many students can earn $20,000 at a summer job? If you can find a job at $10 an hour you can work 40 hours a week for 16 weeks so you could gross $6,400 during the summer, which of course will be less after taxes and other deductions.
So, even if you can work eight hours per week throughout the school year at a part-time job it's not mathematically possible for a student to earn even half of the cost of a typical university education. If your parents can't make up the difference your only other option is probably a student loan. Even if you're covering half your costs you graduate after four years and my example with $40,000 in debt. Is that student loan your fault? Should you have skilled college or university and entered the work force right out of school? Perhaps but without a post-secondary education it might be more difficult to find a well paying job. For young people today there are no easy answers and it's not their fault.
I've got more thought so please stay tuned, I'll be back after the break; you're listening to Debt Free in 30.
It's time for the Let's Get Started segment here on Debt Free in 30. Today we're answering the question is it my fault? If you've never had financial problems it may be difficult to understand how someone can get into debt. So, let me explain by telling you the story of Sarah.
Sarah is not her real name and I've changed some of the facts but here's her story. Sarah was raised by a single mother so at an early age she learned the value of hard work. She started babysitting the neighbourhood kids when she turned 13 and by age 16 she had two part-time jobs working in a store after school and a restaurant on weekends. She saved enough money that she was able to pay for a good portion of her university education and she was happy to graduate with honours with only $10,000 in student loan debt, which was far less than most of her friends.
The year she graduated from university was a tough year. The economy was in a recession so not being able to find a job in her field she went back to working two jobs in retail and food service but she only earned minimum wage. Two years after graduation Sarah was able to get a job as in intern in her field but it was an unpaid internship so she continued working her weekend job to survive. With the internship experience on her resume, Sarah finally found an entry level position in her field.
Unfortunately the job required a car so with minimal credit history, Sarah's only option was to finance a used car through a high interest lender. She used her credit card to buy some clothes for work. She did great in her job but now that she was working she was required to start making payments on her student loan and with her car loan and credit card payments Sarah was only able to make minimum payments.
Then one morning on the way to work, Sarah was hit by a drunk driver. Sarah broke her arm and leg, her car was destroyed and she spent six weeks in hospital recovering. Her car insurance paid her the replacement value of her used car, which was barely enough to repay the existing loan. Health insurance covered her stay in the hospital but her sick benefits didn’t start till she was off work for six weeks so she had no choice but to use her credit card to pay her rent and her car insurance.
Sarah was lucky. She made a speedy recovery and was back to work three months after the accident. Unfortunately she now had a student loan and a credit card in arrears so to replace her car with another used car, the interest rate on the car loan was even higher. Sarah calculated that it would be many years before she could pay off her student loan, car loan and credit card and only then would she be able to think about saving.
Well, Sarah was lucky. She was able to return to work in three months, her employer was very accommodating and held her job open and shifted her work responsibilities so she could continue her physiotherapy. Sarah, didn’t have a spouse or child to support and she didn’t have a big mortgage to worry about. Her situation could have been much worse. But even as one of the lucky ones Sarah, who was a hard worker, was still stuck with a lot of debt and no prospects to get out of debt any time soon.
So, now I ask you to consider this question what should Sarah have done differently? What different actions could Sarah have taken to avoid her dire financial circumstances? Well, perhaps instead of going to university she could have continued to work at her minimum wage jobs. She wouldn’t have had a student loan and with hard work maybe she would have advanced to a job making more than minimum wage. Perhaps she should not have been driving to work on a road that a drunk driver was driving on. Or perhaps there wasn’t anything Sarah could have done to avoid her current circumstances. She did everything right and she still ended up in debt. It's not Sarah's fault.
At the start of this show I mentioned the financial gurus who tell you that into each life some rain must fall. But with a good work ethic and frugal lifestyle Sarah can get back on track. Well, so let's test that opinion by doing the math. Let's assume that Sarah's take home pay is $2,500 a month and let's assume that her rent, food, transportation and other basic living expenses are also $2,500 a month. So, here's the math question. How much can Sarah afford to pay each month to pay down her credit card and student loan debt? I'll wait while you get out your calculator to perform this complicated calculation.
Well, of course the answer's obvious. Despite living a prudent and frugal lifestyle, Sarah has no extra money to devote to debt repayment, none. And that's why for some people, debt problems aren’t their fault. It's not always possible to work harder to make ends meet. Sometimes the ends don’t meet. So, before you beat yourself up over your debt problems of before you start yelling at your adult children or your friends of family members for having too much debt, remember that sometimes it's not your fault. Sometimes you do everything right but stuff happens and you end up in debt through no fault of your own.
If that's you, don’t focus on the past, start looking for solutions for the future and don’t blame yourself. I'll be back with some final thoughts after the break, that was the Let's Get Started segment right here on Debt Free in 30.
Doug Hoyes: Welcome back, it's time for the 30 second recap of what we discussed today. On today's show Kelley Keehn and Robert Brown both explained that circumstances beyond our control can lead to financial problems but we should also do what we can to prepare for the future. That's the 30 second recap of what we discussed today.
So, what's my answer to the question whose fault is it? I'm not a judge, it's not my job to determine guilt and innocence. If you want a quick answer, the answer is it's everyone's fault. It maybe my fault for borrowing too much but lenders must also accept some blame for aggressive lending practices that make it hard not to borrow. Many people today have debt and other financial problems that are not entirely their fault. The sooner we acknowledge that reality, the sooner we can start working on solutions and solutions for the future are a much more productive exercise than paying the blame game for past perceived sins.