Why do people in developed countries still fall into the "debt trap" ?

tomar

Ad Honoris
Jan 2011
13,755
#1
This is about countries with relatively high standards of living and comparatively high revenue with a significant portion of the population in the middle class

Countries where education is mandatory till the age of 16 and where a majority go on way beyond that.

So in essence, a wealthy well educated population.

The average american for example is estimated to have some $40 000 worth of personal debt (not including mortgages). That would be $160 000 for a family of 4. Way above 1 year of average revenue even if both parents are working

Yet the principles of sound financials for an individual/family are fairly simple, and can be summarized as

1. Spend less than you earn, this include:

  • postpone non essential purchases until you have saved the necessary amount
  • live where you can afford it (so outside expensive areas such as city centers), drive what you can afford
  • avoid non essential expense (restaurants, gadgets etc...)
  • avoid any loans except mortgages .... if for any reason a loan cannot be avoided, avoid high interest loans (including credit cards)... never max out on your borrowing (allow for a possible drop in your revenue)
  • optimize your expenses

2. Always keep a reserve of money for emergencies

3. Optimize (mazimize) your revenue


Not rocket science. Yet a significant number of people fail those basics.

Why ?
 
Aug 2014
4,677
Australia
#2
Most people today are not taught financial literacy either at school or by their parents. For example, many people think that they only need to make the minimum payment on their credit card to pay off the debt. When I was growing up I was taught that the only thing you borrow money for was a mortgage. For everything else, you save for, and only buy when you have the entire amount.
 
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AlpinLuke

Forum Staff
Oct 2011
26,843
Italy, Lago Maggiore
#5
Public or private dept is an engine of modern economies [it's part of the "financial sector"].

For example Italians tend to save money and statistically we've got money on the current account, not debts [there are Italians with debts as well, buta good majority of us saves money]. This means that the circulating monetary [real or electronic] mass risks to be limited. We are enough lucky that our government keeps on creating a nice enormous public debt ...

In a few words, the private properties of the Italian people value more than the gigantic Italian public debt.
 
Nov 2018
345
Denmark
#6
Even if you have gone to school for 10 years it does not mean that you can read, write and calculate.
Moreover, schools don't teach kids anything about economics at least not here in Denmark. Which I also think must be the responsibility of the parents.
Studies have also shown that some do not know that they have to pay interest on their loans and compound interest is a city in Russia.
Which is not good because some of the loan companies charge up to 761% in interest per year.
Now the number of people in Riber's Credit Information (a private company owned by i.e. financial institutions and mobile operators, which has lists of people who have not paid their debts.) has decreased, but just after the financial crisis, the number of poor payers exploded.
There I want to blame the banks. The value of the houses had risen to completely insane prices. In addition, if you had just a little bit of equity you were bombarded by your bank with offers of loans not just for home improvements but also for consumer loans.
The whole country (most of the world I think) danced in a witch dance of loans and consumption. Then came the financial crisis, and the rest is history.
However, it also has something to do with wanting to live up to a certain standard and unable to postpone your needs.
We have a reality show here in Scandinavia and for once, as far as I can see it is not developed in the US but in Sweden, it's called the Luxury Trap.
The concept is that you are in a hopeless debt and then some financial experts will come and help you out of debt.
They contact banks and loan companies and try to negotiate some better loans.
However, at a cost, if you don't have a job, find one. If you have a house or car you can't afford, sell them.
Quit the cigarettes, drop fast food 7 days a week. The missus and the kids don't need new clothes every month, sell the 10 pedigree dogs and the riding horse, and so on and so on.
The funny thing is when the experts tell people they have to change their way of life, although the concept is known by God and every man in Scandinavia, they still expect the two counselors to swing a magic wand and then their debt is gone and they can continue their way of life.
The meaning of the show, as with so many other reality shows, is of course the viewers can sit and feel morally superior. And sometimes you think it's acting. So stupid people don't exist.
Sadly, the statistics still tell a different story.
 
Dec 2015
3,730
USA
#7
I believe we hear more about student loan debt today compared to in the past because the media outlets are bigger, information travels faster in our age. And of course the sheer # of folks with high debt today is larger compared to those of the past in the USA at least this can be said.

One reason of higher debt today is possibly related to the fall of the Steel and Auto jobs in the USA. In 1972 starting out at many steel or auto companies after 90+ days on the job you would get equal pay for equal work. One would be making what the men or women who was on the job for 12 years made over 30$ an hour adjusted for inflation. 30$ an hour is a solid middle class wage today. But most of those middle class jobs are gone today. And The same companies such as Ford and GM that used to provide great middle class jobs now pay less then 20$ an hour, and at times do not come with a Union. Ford still does have a union but its new hires no longer get a pension and they start with a wage considerably lower then what multiple generations made before them.

Union jobs used to make up 35% of all jobs in the USA. We live in a world that differs from the world of the past in some ways good and in some ways bad. Union jobs in the present only make up about 11% of all jobs in the USA. Today its Wal mart that employs over 2 million Americans, the largest employer in the USA and in the world is wal mart. Wal mart is a company that IMO provides a bad product(often unhealthy frozen food and poor meat, expired products) with low pay and poor benefits to its workers, walmart does not allow Unions as well. Where as the Steel and Auto companies of the past employed millions of Americans while also providing millions of Americans with very useful products. McDonalds is the 2nd largest employer in the USA today. We all know that McDonalds does not provide healthy food, yet McDonalds takes in billions of dollars. McDonalds does not provide Americans with a great product as did the Steel and Auto companies. OP, Americans do not have the savings they used to have. The middle class has fallen, but we still have an upper class and a remnant of a middle class. The USA still has the worlds strongest military and there is still the dream(a false hope in some ways) poor immigrants have that by coming to the USA without a college degree and no English that they can still make it in the middle class...that was the case in the past but not so much today.


What Really Made America Great? To a Large Extent, Unions—and They Can Do It Again

Yes, Half of Americans Are In or Near Poverty: Here's More Evidence

For most Americans, real wages have barely budged for decades

Part of the reason why more Americans are in debt today is because unlike in the past, there is not the opportunity for masses of Americans right out of high school to get a job at a steel or auto plant and be set for life like it was the case for almost 100 years going back to the early 20th century. By 1914 Ford had implemented the 5 $ workday and by 1941 Ford had finally reached a deal with the UAW one of the largest and most important unions in all world history.

Today we lack visionaries such as Henry Ford, men whom wanted to get massively rich but also whom had a desire to help the world. And today it seems more young Americans are pressured to get a college degree that costs tens of thousands of dollars if not more, and these young Americans do not always complete the degree and even if they do they have the task of finding a good paying job in the field they desire. Where as in the American past we had a stronger middle and upper class we have a lesser middle class today and seemingly a lesser upper class.

The fall of the Union jobs is blamed on poor Union leadership, bad Gov policy, greedy employers and employees...w/e the case the middle class was strong and had considerably less debt for multiple generations in the USA. In going forward the US and other countries should figure out how for multiple generations families thrived due to the high # of middle class jobs in the USA for most of the 20th century. At one point in US history at one Ford Plant alone in The River Rogue complex, 75,000 Americans were employed. Today the River Rogue employees 6,000 people. That downfall has been felt all over the country, in my city we went from 100,000 steel and auto jobs to maybe 5,000 of them. So whether its the steel or auto industry or a different industry, a way out of huge debt for Americans is to have a strong middle class where right out of high school people can get a job that will set them for life.
 
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Theodoric

Ad Honorem
Mar 2012
2,884
#8
Student debts are easy to avoid. But I fear it goes against the corporate shareholder opportunity in certain countries which allow banking conglomerates and other financial institutions to sell loans to unsuspecting students, and they will make it as easy as possible to keep these debts long term should they have influence within the government.

1. Publicly funded tuition + government regulation on tuition prices via bargaining with the financial coordinator of the higher educational institutions board
2. Mandate 1 year of employment in the public sector prior to University with a forced 30% savings fund. So if a student makes 100,000 of whatever currency, 30,000 is in the saved for school, 70,000 is free for the individual; but they should be encouraged to save.
3. Force Union membership before University. Not sure what the labour situation is in the US, but this is a good way for young people to help protect their wage rates from abuse.
4. Subsidized living expenditures, and this would depend on the location, but various housing systems can be privately owned and paid for, or publicly owned and the student has a fixed rate.
5. Encourage part time employment during studies (1-3 days a week). Perhaps via union contract.
6. Ban student loans, these are predatory in nature. The five steps above are simply to make this step possible while having education open to everyone. Regardless of how you think it should be done, this is the key step that must remain.
 
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Nov 2018
345
Denmark
#9
Student debts are easy to avoid. But I fear it goes against the corporate shareholder opportunity in certain countries which allow banking conglomerates and other financial institutions to sell loans to unsuspecting students, and they will make it as easy as possible to keep these debts long term should they have influence within the government.

1. Publicly funded tuition + government regulation on tuition prices via bargaining with the financial coordinator of the higher educational institutions board
2. Mandate 1 year of employment in the public sector prior to University with a forced 30% savings fund. So if a student makes 100,000 of whatever currency, 30,000 is in the saved for school, 70,000 is free for the individual; but they should be encouraged to save.
3. Force Union membership before University. Not sure what the labour situation is in the US, but this is a good way for young people to help protect their wage rates from abuse.
4. Subsidized living expenditures, and this would depend on the location, but various housing systems can be privately owned and paid for, or publicly owned and the student has a fixed rate.
5. Encourage part time employment during studies (1-3 days a week). Perhaps via union contract.
6. Ban student loans, these are predatory in nature. The five steps above are simply to make this step possible while having education open to everyone. Regardless of how you think it should be done, this is the key step that must remain.
Unfortunately, I don't think it's that easy.
  • In Denmark, most schools and universities are public and most are free.
  • I think there's more than enough public employees, taxpayers must pay for.
  • You cannot force people into a union that is against the Constitution at least in this country.
  • In Denmark, all students, including foreigners, receive educational support which goes up to € 500 a month.
  • Most students in Denmark have extra jobs both because of the money, but also to gain work experience and network.
  • People will go to private loan sharks instead.
Danish students can get a loan from the state without interest and easy repayment times. And in spite of that, the total debt of students who did not repay their loans is € 134,047,759.
Frankly I think it also has something to do with attitude, why worry it's just the public paying.
 
Jun 2017
398
maine
#10
1. Our parents lived in "boom" times and our mentality was set then; now that the economy is not so positive--or as spread out--we don't change behavior.
2. For years, many economists told us that debt was not necessarily a bad thing IF.... (unfortunately, most only heard the first part). The attitude toward having debt has changed.
3. Joan of Arc is correct: the decline of unions has been major.
4. Income and wealth inequality mean that there are too many scrambling for the same too few dollars.
 
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