Carrots or consequences?

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?

4 Responses to "Carrots or consequences?"

  1. I like the stick that TFSA provides to the government — mess with our savings at the expense of your political support!

    I don’t really agree with a carrot & stick in practice because, in practice, much of the money will end up being filtered to bureaucrats, rich financial advisors, banks, and everywhere but the actual retiree.

    Instead, what you could do is boost OAS and scale out CPP, leaving that money with people to invest or spend as they place. The influx of savings into the economy based on people’s investment decisions would be a large boost for the economy, as well as would the spending of those that choose to spend. Right now the CPP is less than 20% funded with the rest coming out of current taxes so most of that is going to consumption anyways.

    Don’t expect it to happen politically speaking, though.

    1. @Invest It Wisely,

      Thanks for your detailed comment. The gov’t better not mess with our TFSA!

      I guess I’m just annoyed, a bit, there are no incentives nor major consequences to saving or investing.

      The repo-man will come and take away your car if you don’t make your car loan payment, but the government really doesn’t care if you don’t save anything. Does that make sense? Where is the accountability?

      If you do nothing, you still have our social safety net to rely on. I don’t that makes sense in all cases. For the poor and desparate few, certainly. But few others.

  2. Bigger Carrots or Bigger Consequences? I think the obvious answer is both. The CPP is the forced savings program you describe. EI is the mandated version of short-term savings to support job-loss. Then we have the RRSP and TFSA, both of which are optional (and excellent) programs that are available to Canadians as they fit into their larger financial plans.

    I'm cool with both options.

    As far as Canadians carrying too much debt, clearly that's the case. The pendulum has swung too far. But, I'm ok with debt on many levels. The moment I pay off my mortgage, I'm going to have $1500 extra to spend each month – and I will spend a good chunk of it. That's inflationary. Debt acts as a cap to growth and I think that has a positive side. I guess it's all about balance!

    Steve in Oakville


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