Reflections on Finance and the Incentive to Budget, Part 1

Appar­ent­ly my excur­sion from the oth­er day left me laid up a while after­wards, so I’ve been using the time to rest, catch up on cur­rent events, and read up about one of my oth­er peren­ni­al loves: finance.

I can’t men­tion it enough: a great many peo­ple I’ve encoun­tered over the course of my life have great dif­fi­cul­ty doing some­thing as sim­ple as bal­anc­ing a cheque­book. They take on too many bad debts at unre­al­is­tic inter­est rates, they take on finan­cial instru­ments that built with only the short term in mind, they lose track of where the mon­ey goes each pay­day, or they neglect the pur­pose of cre­at­ing and pro­tect­ing a sav­ings. All of these are patho­log­i­cal and may not at first seem to have that much of an impact, but they cause seri­ous dam­age and a great deal of strife in the end.

Worse still are those who cre­ate an arti­fi­cial cri­sis: they cat­a­stro­phize the state of their being to exclude them­selves from scruti­ny, or choose to stay anchored to cir­cum­stances they could extract them­selves from — for exam­ple, mak­ing proac­tive ren­o­va­tions or repairs to a home that’s bleed­ing out mon­ey through exces­sive ener­gy bills each month, instead of putting up with the sta­tus quo.

Worst of all are those who under­es­ti­mate infla­tion, ignore the real­i­ty of com­pound inter­est, and fail to plan accordingly.

Let’s begin with a bit of a backgrounder.

Infla­tion is the annu­al increase in the price of goods, and also the annu­al decrease in the val­ue of mon­ey. In sta­ble economies it tends to be fair­ly low, but nev­er­the­less it’s an inevitable func­tion of the sum total of all the increas­es our soci­ety sees in its wages, food costs, hous­ing and real estate, com­mod­i­ty val­ues, and oth­er fac­tors. Finan­cial ana­lysts use these in deter­min­ing the Con­sumer Price Indices (CPIs), which rep­re­sent for our pur­pos­es what a typ­i­cal ‘bas­ket’ of goods would cost, then and now.

Look­ing at the last thir­ty years in Canada:


First, I draw your atten­tion to the aver­aged year­ly infla­tion rate, 2.58%. While it may be with­in Bank of Cana­da tar­gets, this is still very bad news. As you may be aware from com­par­i­son shop­ping across var­i­ous dif­fer­ent finan­cial insti­tu­tions, almost no one on the mar­ket cur­rent­ly offers a sav­ings account with an inter­est rate above 2%. That means you’re auto­mat­i­cal­ly los­ing mon­ey year over year whether you put it in the bank or stick it under­neath your mattress.

In the broad­er scope of things, inter­est rates in gen­er­al have grad­u­al­ly been dri­ven down over the course of that same time span, and present-day invest­ments have nev­er looked so sick­ly. Of course, that’s also because inter­est rates are being kept arti­fi­cial­ly low to spur house­hold spend­ing on all man­ner of goods large and small, be it hous­es, vehi­cles, or home computers.

Remem­ber how car loans car­ried 5.0% to 7.25% base inter­est all those years ago? Gone! Mar­ket forces have not only nixed most essen­tial bar­ri­ers to entry so that more peo­ple can play the game, finance insti­tu­tions have also made it pos­si­ble to get quick, cheap grat­i­fi­ca­tion through deferred-pay­ment loans sys­tems. You know the type — “Buy now, don’t pay for X num­ber of years.” If you haven’t been liv­ing under a rock, you’ve prob­a­bly noticed these types of schemes are being pushed every­where … car deal­ers, fur­ni­ture stores, elec­tron­ics retail­ers, and many more. Instead of sav­ing up and buy­ing when they can afford to buy things, peo­ple are steadi­ly tak­ing the bait and liv­ing on bor­rowed funds.

Hous­ing prices have fol­lowed a sim­i­lar pat­tern: where once the banks expect­ed a rea­son­able 10% or 20% down pay­ment so the bor­row­er could prove they had the means to stand the test of time on such assets, we as a nation have been grad­u­al­ly low­er­ing the bar. Today you can find inter­me­di­aries — or even, heav­en for­bid, banks — who can assist you in buy­ing a home with­out any down pay­ment at all! To sweet­en the deal, they may also set the deal up on a float­ing inter­est rate, which under cur­rent con­di­tions means you’ll pay very lit­tle inter­est. Should rates rise in the future, though, and the buy­er not be in a posi­tion to plan for that con­tin­gency, it can get ugly fast.

Cred­it cards, once a rare phe­nom­e­non sev­er­al decades ago, have also moved in to take up the slack where oppor­tu­ni­ty knocks but cash flow lacks. They have also come into place in many pay­ment sys­tems as the de fac­to exchange method because of their con­ve­nience, fast authen­ti­ca­tion tech­nol­o­gy, and rel­a­tive­ly user-friend­ly inter­face (eBay is one such exam­ple). As tes­ta­ment to both sides of the cred­it card equa­tion, the aver­age con­sumer today car­ries three active cred­it cards at any giv­en time.

Unfor­tu­nate­ly, the cred­it card sys­tem also has a pro­lif­ic dark side and a ten­den­cy toward abuse that has become espe­cial­ly preva­lent in recent years. Too many peo­ple use it willy-nil­ly as ‘free mon­ey’ instead of as a means to prop­er­ly mobi­lize funds they already have in their pos­ses­sion. As a result, the aver­age con­sumer cred­it card debt load remains in excess of $3,000, and some nev­er man­age to ful­ly pay those bal­ances off.

When you con­sid­er that aver­age real wages over the last thir­ty years have either large­ly remained stag­nant or gone into decline, a fact echoed even by high rank­ing econ­o­mists, this should­n’t real­ly come as a surprise.

Last but not least, there’s the arche­typ­al rite of pas­sage for my gen­er­a­tion: the gov­ern­ment spon­sored stu­dent loan. Where once they car­ried stricter bar­ri­ers to entry, were more dif­fi­cult to secure, and orig­i­nal­ly did­n’t tend to doom the bor­row­er to pro­tract­ed bouts of Ramen noo­dles and lit­i­ga­tion, the land­scape has changed dra­mat­i­cal­ly even in just the last decade. The cur­rent nation­al aver­age states most under­grad­u­ate stu­dents end up car­ry­ing $19K of debt upon grad­u­a­tion, and that’s just the mid­dle of the range. For those who did­n’t take on employ­ment to off­set their costs, or for those that failed to plan ahead and seek mar­ket insight on the val­ue of their degree, it winds up being the ulti­mate rude awak­en­ing. It is also a lit­er­al mine­field for any­one who thinks they can dis­charge these types of loans through bank­rupt­cy — it’s near­ly impos­si­ble to accom­plish, and most times also becomes a mag­net for the scorn of sit­ting court judges. The gov­ern­ment wants to see its bor­row­ers make good on their commitments.

All in all, this game of play­ing fast and loose with finan­cial stan­dards, with every­one seem­ing­ly in a race to the bot­tom as we elim­i­nate sen­si­ble pro­tec­tions and bar­ri­ers to entry, is one that’s become increas­ing­ly self-destruc­tive, with few­er peo­ple putting aside any mean­ing­ful amount of sav­ings, and more peo­ple eager to leap into cheap grat­i­fi­ca­tion on the things they want.

As a nation we can ill afford to sus­tain the cur­rent sys­tems in place, much less recov­er in a time­ly fash­ion from the bur­dens our cur­rent habits will pose to future generations.

It’s time we gave our­selves a col­lec­tive real­i­ty check.

Remem­ber the part where I quot­ed the Bank of Canada’s per­cent change in the cost of goods over the last thir­ty years? That’s a 114.69% increase. The most reveal­ing part is when you stack that up against the fact that for most, wages have remained stag­nant … sud­den­ly, the whole mess begins to make a lot of sense, and it dawns on us why we’re see­ing an epi­dem­ic of cred­it card debt, pay­ment delays, high ser­vice costs, and explod­ing house­hold debt loads.

The finan­cial sto­ry of our nation has become a strange dual­i­ty, one of either liv­ing above one’s means by dint of the arti­fi­cial cur­ren­cy solu­tions our mar­kets offer as a cop­ing mech­a­nism for a cash-strapped soci­ety (read: go into debt), or sim­ply cut out what goods and ser­vices one can afford to lose with­out sac­ri­fic­ing the stan­dard of liv­ing too severely.

If you must know, I’m from the old school of thought when it comes to such mat­ters: if you can’t afford it, don’t waste time striv­ing for what you can­not have. Do with­out, and find ways for­ward. Oth­er­wise, if you must have it, then at least find a way to make it work for you with­out becom­ing indebt­ed to some­one else.

In oth­er words, don’t be afraid to impro­vise and espe­cial­ly don’t be afraid to learn along the way or think on your feet — it’s a time where true cre­ative spir­it shows its great­est returns.

On this last point, I must also point out that cer­tain projects I’ve com­plet­ed, par­tic­u­lar­ly the Prometheus Car­go Trail­er Sys­tem, were born out of that exact neces­si­ty to find a solu­tion for a prac­ti­cal prob­lem. In my case, I can’t afford a vehi­cle and don’t dri­ve, so the options for alter­nate trans­porta­tion of heavy goods are lim­it­ed on the com­mer­cial front. There are times where one has to move an item between two places and it’s not prac­ti­cal to take a taxi, rent a truck, or else it’s sim­ply more eco­nom­i­cal to save the mon­ey for some­thing else. To fill that gap, I cre­at­ed a bicy­cle mount­ed trail­er that can move loads in excess of a hun­dred kilo­grams — includ­ing appli­ances and cer­tain types of small­er house­hold furniture.

I’d also like to point out that tak­ing on projects like these is rep­re­sen­ta­tive of a larg­er do-it-your­self ethos that too many of us have for­got­ten in a world filled with eas­i­ly acces­si­ble con­ve­nience. And, as before, there are times when it sim­ply makes good sense to eschew a lit­tle of that con­ve­nience, take risks, and put some seri­ous effort into bud­get choic­es that will allow us to have those lost dol­lars and cents trick­le back into our pock­ets, lit­tle by little.

You see, while this arti­cle isn’t a hard and fast set of rules on bud­get­ing, it does very accu­rate­ly rep­re­sent my views, guide­lines, and ethics on deal­ing with finances in the sense that one must be will­ing to con­stant­ly ques­tion what’s going on around them, ques­tion the sta­tus quo, seek out oppor­tu­ni­ties to apply ini­tia­tive and cre­ativ­i­ty, and make that extra lit­tle effort to take back what would oth­er­wise bleed away in small amounts each and every month.

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