I don’t like debt.
It doesn’t consume me but I do think about it often enough. I guess that makes me an oddball or at least a little bit paranoid because I read articles everyday in the Globe & Mail and in online media about folks who don’t give much thought to how much debt they owe.
I often wonder why that is.
Why do some folks laugh-off the debt conversation?
Thinking about this more made me think of this question:
Carrots or consequences: which one is the better driver to change financial behaviour?
I consider some types of debt “normal” so I guess in a sense it can’t be avoided only managed and hopefully well at that. If I could have paid cash for my home, I would have. If I could pay cash for my next car, I will. Right now, we own our cars. Our mortgage debt is about 25% of our net income. That’s as high as I ever want it to be. In fact, that’s plenty enough for us so we’re trying to pay our mortgage off as fast as we can while still living for today.
When it comes to debt, there are immediate and long-term consequences to poor financial management. If you don’t pay up for services rendered or loans I guarantee the people you owe money to will get frustrated, angry (or both) and hunt you down. That will likely make you frustrated, angry and stressed-out as well. It could lead to a poor credit rating, denied credit altogether, bankruptcy or even jail time in extreme cases. None of these outcomes are a good news story.
On the other end of the continuum nobody is forcing you to invest, there are no immediate consequences anyhow. Sure, you get some pressure (or guilt) from financial institutions to save but that’s about it. It’s up to you to decide if you’ll be eating cat food or something else in your golden years because nobody is going to beat down your door to force you to open a TFSA, RRSP, or even a savings account. Nobody cares if you keep those accounts growing either.
What if there were major consequences to not investing?
Better still, what if there were huge incentives or carrots to push people to invest and stay invested?
Financial incentives are everywhere in private and public programs outside of the financial industry itself it seems. Financial incentives and disincentives have long been used as part of health promotion and prevention campaigns, to motivate populations to change their behaviour. While success rates of these programs can vary and could be debated infinitely, don’t think for a second addictive behaviours like smoking or drinking are not taxed for a reason. Incentives and disincentives work because they’re derived from learning principles: they capitalize on human nature’s present bias in hopes of creating longer-term change.
Wouldn’t a focus on present bias take a significant financial burden off our social safety net when we’re ready to retire? To this end, why not mandate or regulate a forced savings program? Save 5% or your net income or else?
Why isn’t financial management a core competency within our secondary school education system?
Do Canadians not believe in financial literacy?
Again, I’m not a fan of debt. It worries me. I’ve learned more on this subject and investing in general in the last 5 years than I ever did during my half-dozen university micro- and macro-economic courses because I’ve needed to. I “woke up” a few years ago and realized I didn’t want to be 55 someday and find out I needed to save a kagillion more for my retirement or I only had a few working years left to pay off my mortgage. I wish I knew in my 20’s what I know now in my 30’s but nobody was forcing me.
Bigger carrots or bigger consequences: what is the better driver to change financial behaviour for the masses?
Maybe both is the answer?