Financial Hardship

It’s no news that most Australians are in financial hardship. In 1986, the income to debt ratio of Australians is about 40%. Fast forward 20 years later, that same ratio spiked to about 158%. Sure, mortgages and student debts no doubt play a part, but a recent study by the RBA showed even credit card debts jumped to reach $49.3 billion nationwide, with the average credit card debt hovering at $3321.

Ms Southon, spokesperson for Debt Relief Australia, says its best, “”People have these huge credit card debts and no assets through that spending because they are buying goods which depreciate in value.”

The tanking economy, the incompetent government, the greedy banks and the cruel corporations all played a part, but at the end of the day it’s the consumers who forked over the money. And if you wait for all these people to change the world… well, then good luck waiting. Instead, why not take control? Play the game and win.

Common Causes Of Financial Hardship

To win the game, you must first know the rules.

Rule #1: Good debt vs Bad debt. Are you borrowing to invest, meaning buy something that grows in value, or are you borrowing to spend? People who are financially successful know that while investments sometimes do go wrong, those who borrow to spend are guaranteed to fail. As described in the best-selling book, “The Richest Man in Babylon”, most people who appear rich (those living in fancy neighbourhood and those wears brand labels) are more often than not financing their lifestyle with debt. When the economy tanks, these people are the ones who lose their livelihood.

Real millionaires live within their means. They are regular people who live in normal neighbourhoods. And they invest the difference between their income and their expense.

Rule #2: Get rick quick vs get rich constantly. Are there some secret ways to get rich overnight? To be honest, yes. More than once Wall Street has turned a man into a billionaire in 24 hours. But these people are often highly experienced investors/traders who waited patiently for the market to do something extraordinary – like a crash or a miraculous recover.

Chances are, that’s never going to happen to you. Trying to get rich quick is like gambling – and you know what happens to gamblers. Instead, why not go slowly? A long term study by B&T showed that if you invested in company stocks for a year, on average, you would have lost money. But if you held those same stocks for 10 years, on average, you would have made money.

Rule #3: Assets vs Cashflow. A lot of people technically became millionaires during the property boom of 2005 to 2007 in the U.S. The house they live in, according to the market, is now worth more than $1 million.

But here’s the kicker: their income stayed the same and they had to service the huge debt that came with the property. So when the economy tank and they lost their job, they could no longer service the debt and had to sell their property to avoid bankruptcy – which, by that time, is worth less than half of its original value.

The bottom line is, there must be a healthy balance between cashflow and assets. That healthy balance depends on various personal factors (like your age, your goals, etc) so make sure you learn the basics of accounting and personal finance!

Rule #4: You can only manage what you track. Most people muddle through their financial lives without so much as a glance at their bank statements, let alone a balance sheet.

But here’s the thing: how do you manage what you don’t track? How do you know if you’re overspending on groceries? Is your problem even related excessive expenses or is it because you simply don’t earn enough?

First you need to identify exactly what is the issue, then you can actually do something about it. Make sense right? And you wouldn’t know exactly what is wrong if you don’t record your financial activity, would you?

Turning Things Around

Now that you know the 4 basic rules, what are you going to do? Most people get all excited and implemented everything. They signed up for personal finance classes, the start tracking every penny, and they cut out every single discretionary expense in their lives.

Which, of course, doesn’t work. You made a new year resolution and you know that 9 out 10 resolutions are never achieved. The reason is simple: you made too drastic a change. Change is uncomfortable so it’s our natural tendency to revert to our old habits.

It’s crucial that for any change to last, it has to be gradual. Start with a simple budget. You can get started by downloading a budget spreadsheet and fill out all the information it asks for. That should give you a basic overview of what your financial status looks like.

Once you know where your money is coming from (if you have investments and/or multiple incomes) and where your money is going, you can begin to look for opportunities to cut your expenses. Pile up your new savings, and when you think you’re ready, sign up for a personal finance course to get educated about your financial choices. Consult a financial planner to plan the best way to invest that money.

And remember, don’t neglect your fun. If you’re a surfing junkie, including surfing-related expenses into your budget. The best way to drop out of your budget – and therefore drive yourself further into financial hardship – is to deprive yourself of what you like to do most.

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