SOS debt management: education is better than information

“Education is the attempt to ‘lead out’ from within the self a core of wisdom that has the power to resist falsehood and live in the light of truth, not by external norms but by reasoned and reflective self-determination.” ~ Parker J. Palmer, Author and educator

You know how blogging can get a bit much and we start doubting the wisdom of carrying on? For me, two things make it worth it: a) letters from admirers; and b) calls for help. Of the former, I have had two over the twenty months life span of The Money Principle; of that latter I just received one a couple of days ago. But let’s do this in sequence, shall we?

Couple of days ago a message landed in my mailbox. I have started getting a lot of messages and none too exciting. So this one caught my attention: it was entitled ‘Help, what shall I do?’. Naturally, I jumped at the opportunity: there, in front of my eyes was my chance to practice my debt management skills and help turn around somebody’s financial destiny.

The message told a familiar story of debt: this person had close to £14,000 ($22,500) worth of debt spread across the whole array of financial instruments: credit cards, bank loans, car loans and payday loans. Well, this is bad but not that bad, I was thinking; then I read further and realised that this person is on JSA (for my readers in the USA, this is the support for unemployed people in the UK) which is £71 ($113.69) per week, or £3,692 ($5,911) per year. In other words, his debt was over four times his annual ‘income’. Now this is beyond a problem; this is a predicament! No debt management technique can help, it seemed.

Apart from racking my brain trying to figure out ways out of the predicament (and coming up again and again with the obvious one: this person needs a well paid job now), this case also made me think: how does one find themselves there.

At one level, the answer is simple: this person clearly spent more than they earned. And as most personal finance writers would tell us this is the wrong way to go. Some will go even further and offer advice (what can be done and what did I do) and even offer information (these are the possibilities out there). All good stuff!

At another level, the answer is far from simple and straight forward. How does someone on JSA manage to get so much credit? I believe that in the basis of this is the much easier access to credit and the fact that over the last couple of decades responsibility for financial behaviour has been largely transferred to the individual. In other words, we are expected to make choices regarding finance that are only very loosely limited.

Making such choices requires information but even more importantly it requires understanding and the ability to analyse and assess situations that comes with education. Going back to the case I was telling you about, it seems to me that this guy was well versed in his options and used a whole range of financial instruments – in other words, he had information. He did make very bad choices, however, and I believe that some of these were for lack of PF ‘education’.

But let me give you another example about the difference between ‘information’ and ‘education’, and the superiority of the latter.

At the moment, there is a bit of a debate going on around the blogosphere about the ’emergency fund’ (EF). On the one hand there are the ‘traditionalists’ who argue the staring position of the emergency fund in personal finance and debate how large it should be: in the US the recommended size of the EF ranges from $10,000 to …a lot more than that. There has been also a very interesting discussion of how to keep the EF so that it is used for real emergencies. On the other, are the ‘new Turks’ arguing that people don’t need emergency funds but savings and investments. Me, I think that emotionally I would love to have a large EF; when I am my rational self I can see that it is actually dead money.

This is information! Did it help you decide for yourself? I doubt it. To be able to make decisions that will suit you, you need education, you need to know what to take into account when deciding.

So here is what I think.

Emergency? What emergency?

Call it what you want but sh*t happens: we get flat tires, dishwashers get broken and washing machines need replacing. These are all part of ‘little’ trouble and, in my opinion, need about £1,000 ($1,500) available to cope with them.

This is different from a big, fat problem like losing your job.

There is no need to call it ’emergency fund’ but we all need to ensure that we have access to money in the case of ‘little’ trouble and big problems.

Still, how we hedge against these will depend on a number of things.

How much is you cash flow?

Whether you keep £1,000 ($1,500) in an savings account to deal with ‘little’ trouble depends on how large is your cash flow (the difference between your income and your regular expenditure) – if it is equal or exceeds the amount necessary you are likely to be able to meet this kind of emergency from your running budget. If, on the other hand, your cash flow is very small you certainly have to make sure that you have £1,000 ($1,500) easily accessible – failing this can have very serious consequences for your finances.

Do you have access to credit?

People think that they are being wasteful by wasting money; in fact the biggest waste is the loss of opportunity to make your money work for you. Put like this, keeping money in saving accounts doing nothing is very wasteful. In terms of hedging against ‘little’ trouble whether you save the money or not also depends on whether or not you have access to credit. If you have good credit rating and access to 0% interest credit why not make your £1,000 earn interest when not needed?

After all, the emergency may not happen for a long time. There is no point having your umbrella open when it is not raining!

Do you have insurance?

If you have insurance (all kinds of it) you can get away without serious emergency fund. This however is not the case if for some reason you don’t have any.

What are the benefits of your job?

We are moving to BIG problems and the biggest of them all is losing your job. So whether you have easily accessible, liquid savings to cover several months worth of expenses would depend on whether or not you are going to get redundancy pay.

Final Words

There are no doubt other conditions that will play in the decision as to whether to have an ’emergency’ fund and how large this ought to be. However, the point is that this decision is conditional on individual circumstances and general advice is likely to be inadequate.

To make up our mind we no doubt need information; but more importantly we need education: we need to have frameworks that help us figure out situations and position ourselves in these.

4 thoughts on “SOS debt management: education is better than information”

  1. I agree that the better your education in a field – the more choices you have…………… but at the same time a sensible dose of personal responsibility has to be tapped into if you want to get and stay out of debt when on such a small income.  BTW I know that £14K CAN be tackled even on such a small income……………. maybe not cleared any time quickly but certainly tackled, I know because I have tackled something similar.

    When you are literally budgeting to the penny and are not sure how you are  going to feed yourself and your family, your “investments”, your “hedge against the future” become small successes ( a few pounds credit on a Utility account, a sensibly planned and growing stock cupboard of nutritious food, things like that)

    Only when you KNOW you can make it through the month  can you start the process of acquiring an “emergency fund” – BTW mine is the same size as yours but on basic benefits took me a whole year to build.  But I know should something break I can replace it WITHOUT resorting to Interest Bearing credit and putting myself back in the position if chipping away at a debt again.

    Now – well I still have no access to “interest free” credit – so I continue to make my “debt payments” against a mortgage where I have instant access to the funds back at any point.  THis is my “investment” – my “hedge against the future” to create a sensible cash cushion to get myself through any rise in interest rate and provide some working capital to get back into business again.

    But on a tiny income it is a LONG process – and if your writer is on JSA he needs to seek advice from a free debt charity to help him arrange a DMP to manage his debt until his income improves.  Whilst this may not reduce his debt, it will manage the debt by freezing / reducing interest until his circumstances improve – which and Financial Education programme will tell you has to be a better choice at the moment. 

    Good luck to them 

    1. @Elaine: Wow! Thanks for your comment – this article obviously struck a cord. This situation was really bad – the worse thing was that there was no obvious way to stabilise it. There were two payday loans that were accumulating interest very fast. And I still think that without additional earnings it would be a miracle to do.

      More interesting is the responsibility issue. Yes, of course we should be responsible – but this is learned competence. Apart from that responsible borrowing should (and used to be) matched by responsible lending. Now the latter is almost non-existent.

      And I have not had an emergency fund for sometime now – it is all going on the negative wealth. We have increased dramatically our cash flow though – so I know that if a small emergency comes we can meet it; it will only mean a bit less over-payment.

  2. I think access to credit is irrelevant. Many financial emergencies happen because you don’t have access to cash flow. That might mean your job is gone. How do you repay credit when you don’t have a job?

    I’ve always tried to maintain emergency funds without credit. Sure, I’ll use credit rather than the fund if I’m employed (and rack up those awesome airline miles!), but I’d still rather have the cash in place. 

    1. @AverageJoe: Keeping your income is one of the conditions (or variables) I suppose. Thing that concerns me is that a large emergency fund is ‘dead’ money – the only thing it is doing is making us feel more secure. Is there a better way to do that?

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