Why do people have money problems? Why do people have money problems?
Why is it so hard to adjust once you are in a money crisis?
What are the effects of financial pressure?
We are a nation with a rugged individual ethos. We tend to believe what happens to us is a result of a combination of our own actions and maybe the will of a higher being. Consequently, people facing money problems are often feeling guilt and a sense of failure.
However, in the great majority of the cases we have seen, people have been pushed into their money crisis by one or more of the factors listed below. Perhaps you will recognize them.
• Personal breakups leaving a person with the bills of two people or half the income he or she had prior to the breakup;
• Illness or injury that causes a loss of income and heavy medical debts;
• Loss of employment or overtime and a resulting loss of income; or,
• Age or general body breakdown where one cannot work as long or as hard as he or she once could.
This is not to say that very bad financial decisions or being cheated or misled cannot lead to a financial crisis. But, generally speaking, when one pulls the underbrush away, the core problem in the financial crisis is one or more of the four elements above.
One of the problems with having a financial crisis is that there is really very little one can do about it over the short run. If business slows down or a person gets sick and cannot work for a month or two, there is little adjustment that can be made in his or her fixed overhead cost of living. Things such as vehicle payments and mortgages are fixed. The only places one can cut back are on food, entertainment, and perhaps clothing. Without an emergency reserve, there is not enough flexibility in those three areas. This leads to a vicious downward spiral.
Creditors will charge late fees and the interest rate will keep compounding as they charge interest on the interest that accumulated from the months before. Quite often before the person knows it, he or she is deeply in debt. What then typically follows is a desperate struggle to keep the creditors at bay. This is typically referred to as robbing Peter to pay Paul (paying one creditor one month and then skipping a month while another creditor is paid, dodging phone calls, and getting cash advances to pay creditors). All of this pulls the person deeper and deeper into debt.
Generally, people want very badly to pay their debts. That is the way they were brought up, and they believe it is the right thing to do. They also do not like the feeling of paying their bills in an untimely, inefficient way. Not being able to pay the obligations creates feelings of guilt and failure, and the collection calls and letters add stress. This creates a typical pattern of psychological and physical stress.
People we have interviewed reported a typical pattern of problems and symptoms when under financial pressure:
• Insomnia
• Sickness and accidents
• Fights with a spouse or partner
• Problems at work
• Headaches
• Avoidance issues
• Depression
• Grief
You may recognize yourself in this picture. People often do not realize how much pressure they are under because of debt until it is released. The pressure built up slowly, and they adjusted to it each time as it built up. But it is definitely there.
They often say such things as, “I’m forty years old, and I’ve worked hard all my life. I never thought I would be in a position where I was not able to pay my debts,” or, “I live in a nice neighborhood and all my neighbors think I have an ideal life. I never thought this would be happening to me. No one knows what I’m going through. I don’t know what I am going to do.”
Veterans of Vietnam and the Persian Gulf often say having financial problems was worse than being in combat. “I told myself that if I lived through this war, nothing would ever bother me again—but this is worse than the fear of being killed.” In fact, some in debt crisis want to die. Many debtors report they have thoughts about suicide.
One very common concern is feelings of guilt and shame. People do not want others to know. They do not want their parents or children to find out they have money problems, and they certainly do not want their neighbors and coworkers to find out. The effect of this is to isolate the individual and to prevent the stress from being released.
They do not realize how many other people have the same problem. There are hundreds of thousands of cases each year moving through the bankruptcy court, and many more cases being dealt with through Consumer Credit Counseling and other businesses handling debt problems. But debt problems are largely a hidden epidemic. Because everyone is hiding their problem, everyone thinks they are the only one to have such problems. The debt problems cut right across all financial strata. We have had many people come to us who had been making $100,000 or more a year and had still almost had their homes foreclosed.
One answer to avoiding financial problems that arise from a cut in income or medical expenses is to have an emergency fund set aside. Experts recommend a reserve of ready money equal to six to ten months of income. While this is good advice, in practice almost no one can follow it. High tax rates make it hard to make enough money to merely raise a family.
Trying to save a half year’s income from after-tax money is very hard, financially and psychologically. And if you should do it, what do you do with it? Most people will invest these funds in stocks. When a recession hits, they often get a double blow—they lose their job and the value of their nest egg drops.
If you do have this fund, it will hold the wolf from the door for a few months, and with luck you can get back on your feet. But sometimes it all goes wrong and the crisis outlasts your funds. People who had six- to ten-month funds prepared seem to have as much guilt about having a money crisis as people who put nothing aside.