It seems obvious, but the point is, few of us plan our finances in a way that acknowledges this fundamental truth.
Behavioural psychologists no doubt would have something to say on the subject, but my crude take on it is this: it’s hard to go through life expecting the worst, so we don’t.
There’s a tendency towards thinking “today, I’m OK, things are fine” and then thinking that every single day, going about our business and our financial management accordingly. Until one day, it suddenly isn’t.
Here are a couple of personal examples. My Mum died of cancer fairly recently. My Stepfather is self-employed. He became a carer, trying to work around all manner of caring duties that were really a full-time job in themselves. His income suffered, as a big part of his job involves travelling around the country, which he could no longer do.
Mum battled on for more than a year in a state that required a high level of care. Even when she was in hospital, he was going backwards and forwards from the hospital, unable to concentrate on work. The impact on his finances will be lasting – he did take on more debt to get by - although he is now working again.
Here’s another: two friends who live within a mile of me both went through fairly unpleasant divorces around the same time. Both have young children – one wasn’t working when it happened, the other was. Both have had to take on credit card and other debt and will be at risk of having to take on more for many years just to pay for normal life on top of the cost of the divorce (the legal bills in both cases are eye-watering and despite being the victims, no one else is going to pay these on their behalf). It’s a very high cost for freedom from unhappy marriages, but the alternative was far worse.
Of course we can’t expect to get divorced, have cancer, have a disabled child, a redundancy or any manner of the “unlucky” things that can and do happen to people all the time. But it would perhaps be wise to assume that on the balance of probability, at some point in our lives, some kind of ‘life’ will happen.
What can we do about it? There is good budgeting and regular saving. There are emergency savings funds and income protection plans… but these need setting up while times are good. It’s much harder once something has gone wrong. Make hay while the sun shines.
What is really interesting about the StepChange report is its finding that ‘coping mechanisms’, like spending less, applying for benefits, borrowing from friends and family and taking out credit cards aren’t effective for relieving problem debt. That’s because a lot of these coping mechanisms involve simply swapping one form of debt for another. You buy yourself breathing space, but the debt itself is still there, growing (because of interest) and turning into a bigger monster that you will have to face a bit later, rather than not face it at all.
That’s why StepChange is calling for policy changes rather than more budgeting tips for people in debt. Preventing problem debt in the first place is the work of what the industry calls “financial capability” and involves education and guidance on preventative measures: practices and disciplines that everyone should use, like short-term savings and budgeting. These can’t stop life happening, but can make it easier to deal with when it does. As for those currently in a personal debt crisis, prevention tactics may come too late. It’s lifejackets they need rather than swimming lessons. Until someone provides them, as the StepChange report highlights, those in serious debt remain at risk of drowning in it.