Tuesday, April 5, 2011

Real causes of debt are simple; debtors' explanations more complicated.

In my constant quest to find the pot of gold at the end of the Internet, I discovered this gem.

CCCS Causes of Debt

Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.

In short, there are two big problems with the statistics above.

1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.

2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.

I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.

If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.

Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!

1 comment:

  1. Hello,

    We all know some external disasters are great enough to push people into bankruptcy through no fault of their own, no matter what they did beforehand or afterward. We're assuming matters on a smaller scale.

    Here's how both the "wild in the aisles" and "external problem" stories can be right. When times are good, many people live right at or above their means. And that includes assuming obligations like high mortgage or rent payments, car notes or car lease payments, very high credit card balances and the like, where the money has to be there every month or, well, it becomes bad debt. (And in many cases, unpleasant things start happening.)

    The wise person knows that stercus accidit - and puts money aside for the proverbial rainy day. And expects others to do the same.

    So, if one takes home X dollars each month, one should save Y dollars each month. Spending > X - Y, therefore, can be considered going wild in the aisles.

    The layoff, pay/hours cut, illness, accident or divorce may be the trigger for many individuals. But the boot whose treads may miss the ant, squashes the grasshopper.

    What do you think?

    Jeff Deutsch