Why debt woes make good financial planning

“We use a five-year financial life plan,” says Joel Hay, president of Cashflow Strategies and author of Overcoming Financial Fallacies. “The reality is that, if you’ve got a 10-year financial plan, why should you…

Why debt woes make good financial planning

“We use a five-year financial life plan,” says Joel Hay, president of Cashflow Strategies and author of Overcoming Financial Fallacies. “The reality is that, if you’ve got a 10-year financial plan, why should you be cutting that short? If you’re a little overspending, it’s possible that you’ll hit your deadline. But if you look at the new scenario, there are ways you can increase your odds of improving your long-term financial life and making it work.”

“Financial health” is a lot more than a line in a check book. The full implications of health, lifestyle and social circumstances make this a long-term matter. And the future does not look rosy. The UN predicts that the number of people over 65 will increase from 1.7 billion in 2017 to 3.3 billion in 2050, and this will likely make the greying of the global population a tremendous long-term challenge. It makes the importance of balancing financial prospects with choices more urgent than ever. And a lot of the challenge is within our own control.

Balkanising Our Loans

Enterprising bankers are tapping into the fact that household debt has reached record highs in the developed world in the years since the financial crisis of 2008-09. For those savings, the typical interest rate on loans has been on the rise and the trend shows no sign of abating. Interest rates are now more than double their historic averages. And with rates set to increase over the next few years, the future doesn’t look particularly good. “The idea that it’s a ‘cash-out’ or a ‘crowd-out’ trade,” says Hay, “is just wrong. What we’re talking about here is preventing someone from becoming more debt-ridden.”

Mark Carnegie’s New Economics Foundation recognises this and is pushing for responsible lending, which may be an uncomfortable development for many. According to Carnegie, banks ought to insist on suitable and longer-term lending, or require the user to confirm for a number of years that their circumstances will change sufficiently for the loan to be made. Research from Harvard Business School supports this, showing that financial institutions should also consider consumer credit stability as an essential asset.

“If the borrower is going to avoid short-term financial damage, we’ll help them when they’ve decided to borrow,” says Hay. “When you borrow money for a short-term purchase or a project, it takes away a borrower’s ability to spend money on something that will get them back into the black in the long run.”

Coaching Into More Prosperity

The long-term impact of tackling debt is likely to come with stronger resilience. “We should be coachable,” says Hay. “Where we make something enjoyable, we come to understand the positive side of it. If I spend my time thinking about how bad the brain wants me to go, I’ll end up there. With more help, people could make wiser financial decisions.”

Coaching for financial resilience is part of a huge swathe of financial and savings management which includes “skills and agility” (how do I know when I’m spending money wisely?), “soul-satisfaction” (how do I maintain positive expectations about my future earning power), “efficiency” (how do I make sure that what I save is doing the most good), and “decision-making” (how do I learn to live with decision fatigue?). The de-bunking of finances, building of portfolios and loss of loyalty in the wake of post-recession pain are all reflected in these areas.

“Our banks are more than willing to lend us money,” says Hay. “We just have to learn to be responsible with the money that’s on offer.”

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