The Psychology of Debt

Andrew Allentuck

Whether to spend or save – finding the balance can be an emotional chore

The problem is cash myopia — insecurity and a desire for liquidity often go together. If people fear the future, they want to maintain cash balances. People who are secure may be more willing to spend on the pleasures of the moment.

— Ivan Bilash, clinical psychologist

It is an everyday dilemma — whether to plunk down cash or plastic for a new outfit or a car, a washing machine, a dinner out, perhaps a holiday. Plastic postpones the moment of reckoning until the bill comes due. But the dilemma is more than the rational one of whether you really need the new appliance or a meal somebody else cooks.

It is about splurging to buy an outfit that confirms or changes your identity or hoarding old clothes for fear of not being able to buy other things in future. The problem is that it is hard and often impossible to detach emotion from spending.

"We live in a society so heavily marketed in the media that there is a rush to keep up with everyone else," says Scott Hannah, who sees the wreckage of wrong decisions as president of the Credit Counselling Society, a national non-profit organization based in Vancouver that helps people find solutions to their financial problems.

"Then add in the fact that the one asset that people can buy and use well that may appreciate — a home — is often out of reach and it becomes rational, in a way, to spend money on what one can afford."

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He sees the spend-or-save dilemma as a reflection of two problems – omnipresent marketing and low interest rates. One, marketing and the manipulation of buyer psychology by advertising, appeals to emotions. The other, the fact that money saved in cash returns little before inflation and less than nothing after, is an incentive to spend. "Low interest rates punish thrift," Mr. Hannah says.

As well, he adds, when people elect to finance consumer purchases with low-interest homeequity lines of credit, they borrow for transitory needs against the most durable of their assets. That is a decision that they would not make as readily if interest rates were higher, making saving worthwhile and showing the true cost of spending.

What's new in Canada's consumer boom is the easing of guilt about spending.

Of course, a core of consumers remain wedded to an older feeling that thrift is good and spending is bad. Those on fixed incomes may fear running out of money and so tumble into a vortex of hoarding cash and old products for fear of poverty. It is distinctly, if not uniquely, a problem of the elderly, says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. "My mother and father get a feeling of discomfort from shopping. They are traditionalists who find it hard to reverse the belief that one should always spend less than one earns."

The spend-or-save decision comes down to confidence about the future or fear of it, says Ivan Bilash, a clinical psychologist who practises in Winnipeg. "The problem is cash myopia — insecurity and a desire for liquidity often go together," he says. "If people fear the future, then most of the time they want to maintain cash balances and not squander money on transitory pleasures. On the other hand, people who are secure may be more willing to spend on the pleasures of the moment."

There are rational ways to allocate money and to exclude most of emotion from the process. Setting up a budget and living within it means that, down the road, there won't be a surprise when payments for pleasures bought long ago come due to be paid. "You want to avoid buyer's remorse," Mr. Hannah says. The solution, of course, is to practice anticipation — the essence and the purpose of budgeting.

(C) The Financial Post, Used by Permission