tag:theconversation.com,2011:/fr/topics/debt-822/articlesDebt – The Conversation2024-03-19T12:25:19Ztag:theconversation.com,2011:article/2226912024-03-19T12:25:19Z2024-03-19T12:25:19Z$50K per year for a degree in a low-wage industry − is culinary school worth it?<figure><img src="https://images.theconversation.com/files/582641/original/file-20240318-20-1k5k0h.jpg?ixlib=rb-1.1.0&rect=16%2C0%2C5618%2C3751&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cooks and chefs regularly debate the merits of culinary school.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/increase-in-the-price-of-gas-concept-of-problems-in-royalty-free-image/1412088087?phrase=burning+money+stove&adppopup=true">Diy13/iStock via Getty Images</a></span></figcaption></figure><p>America’s culinary schools are feeling the heat. </p>
<p>When chef Gordon Ramsay appeared on an episode of the YouTube series “<a href="https://www.youtube.com/watch?v=ENhfIeZF_AY">Last Meal</a>” in January 2024, he described U.S. culinary schools as “depressing” places that “sandbag” students with tens of thousands of dollars in student loan debt before releasing them <a href="https://www.bls.gov/ooh/food-preparation-and-serving/chefs-and-head-cooks.htm">into a low-wage industry</a>.</p>
<p>He added that graduates are pressured to select jobs that will put them in the best position to pay off their loans, rather than ones that will give them opportunities to learn and grow as chefs. Ramsay singled out the Culinary Institute of America, one of the most prestigious cooking schools in the country, as it sets students at its New York campus back <a href="https://www.ciachef.edu/cia-tuition/">US$52,090</a> per academic year. </p>
<p>Then, at the end of February, The New York Times published <a href="https://www.nytimes.com/2024/02/27/dining/chefs-state-of-the-restaurant-industry.html">a compilation of interviews from 30 chefs around the U.S</a>. They chimed in on a range of topics, but they were pretty much in lockstep when it came to culinary degrees: </p>
<p>“People ask me, ‘What’s a good culinary school to go to?’” chef Justin Pioche said. “And I always tell them: Don’t go.” </p>
<p>Chef Robynne Maii added, “I always sing the praises of culinary school, but in community colleges only. All the for-profit schools need to go away. They’re completely unnecessary and they’re predatory.”</p>
<p>These sentiments are not unique to culinary schools. </p>
<p>Trade, technical and for-profit schools are routinely criticized for their lopsided cost-to-benefit ratio, with scholars such as <a href="https://thenewpress.com/books/lower-ed">Tressie McMillan Cottom</a> and <a href="https://www.press.jhu.edu/books/title/11594/diploma-mills">A.J. Angulo</a> arguing that many of them have predatory financial processes baked into their business models. There has been a similar critique – often tinged with political undercurrents – over <a href="https://slate.com/business/2021/07/masters-degrees-debt-loans-worth-it.html">graduate degrees in the humanities, arts and social sciences</a>, <a href="https://www.wsj.com/articles/financially-hobbled-for-life-the-elite-masters-degrees-that-dont-pay-off-11625752773">described by the Wall Street Journal</a> as “elite master’s degrees that don’t pay off.”</p>
<p>Yet thousands of aspiring chefs continue to enroll in expensive culinary schools, rather than learn on the job while being paid. And in <a href="https://www.rutgersuniversitypress.org/making-it/9781978840126/#generate-pdf">the research for my book on notions of success in the culinary industry</a>, I found that many graduates from these institutions actually feel their experiences were worth the price of admission. </p>
<p>What might explain this paradox?</p>
<h2>Beyond dollars and cents</h2>
<p>Cooks and chefs <a href="https://www.reddit.com/r/KitchenConfidential/comments/9qzw4g/is_culinary_school_worth_it/">regularly</a> <a href="https://www.foodandwine.com/lifestyle/culinary-school-worth-it-four-chefs-weigh-in">debate</a> the merits of culinary school. </p>
<p>It’s also a question I asked 50 U.S.-based kitchen workers during a study I conducted from 2018 to 2020. Of those 50 workers, 22 had attended culinary school. And of those 22 chefs, 17 believed their education was worth the cost – over three-quarters. </p>
<p>They were clear-eyed about how much they would earn after graduation – very little – and they also grasped that the debt would constrain their future work choices. </p>
<p>Yet, to them, the worth of their schooling didn’t hinge on wages and earning power. </p>
<p>Instead, they found immense value in the friendships and connections they forged – and in learning the culture of commercial kitchens. Social scientists have terms for these benefits: <a href="https://www.oxfordbibliographies.com/display/document/obo-9780199756384/obo-9780199756384-0076.xml?rskey=fvSHSB&result=1&q=social+capital#firstMatch">social capital</a> and <a href="https://www.oxfordbibliographies.com/display/document/obo-9780199756384/obo-9780199756384-0209.xml?rskey=UwFmGz&result=1&q=cultural+capital#firstMatch">cultural capital</a>. </p>
<p>Interviewees described being able to meet mentors through school events, gain experience in award-winning kitchens through internships, form relationships with classmates and always have a degree to point to as proof of know-how.</p>
<figure class="align-center ">
<img alt="Bird's eye view of culinary students standing around a piece of pork as an instructor demonstrates how to cut the meat." src="https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=468&fit=crop&dpr=1 600w, https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=468&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=468&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=588&fit=crop&dpr=1 754w, https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=588&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/582645/original/file-20240318-28-lgqhes.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=588&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A Culinary Institute of America instructor demonstrates how to cut pork chops.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CadetsandCooks/635766166c68411b989beb7b1edb3e37/photo?Query=cadets%20and%20cooks&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=15&currentItemNo=2">AP Photo/Mike Groll</a></span>
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<p>Culinary school was particularly helpful for individuals who felt socially disadvantaged in some way. They may have lacked connections and experience, or they were a minority in an industry where <a href="https://restaurant.org/getmedia/21a36a65-d5d4-41d0-af5c-737ab545d65a/nra-data-brief-restaurant-employee-demographics-march-2022.pdf">white men are more likely to serve as executive chefs</a>.</p>
<p>“Because I am a female it was harder for me to get a sous-chef job,” one chef explained to me. “I mean, I saw kids who were not nearly as skilled as I was who got sous-chef positions, and I’d always get passed up. But I really feel that that education [from the Culinary Institute of America] – especially as a woman – really helped me. A lot. I would’ve never got the jobs I got without it.” </p>
<p>In her 2015 book “<a href="https://www.sup.org/books/title/?id=23351">At The Chef’s Table</a>,” sociologist Vanina Leschziner found that elite chefs claim to not weigh academic degrees highly while hiring, <a href="https://www.eater.com/2014/7/28/6184011/chefs-weigh-in-does-culinary-school-get-cooks-hired">a sentiment also found by the food website Eater</a>. At the same time, Leschziner found that 85% of elite chefs in San Francisco and New York were culinary school graduates, with 67% holding degrees from the Culinary Institute of America.</p>
<p>At face value, it’s possible that degrees and certificates are dismissed or overlooked during the hiring process. But social connections are not. So perhaps the networks and friendships formed during schooling are a big reason why most high-status restaurants are staffed by culinary school graduates.</p>
<p>With these industry realities in mind, culinary school doesn’t seem to “sandbag” students; instead, it helps them overcome barriers that they ordinarily couldn’t.</p>
<h2>Not all culinary schools are alike</h2>
<p>Based on my interviewees’ enthusiasm, culinary school degrees seem like a no-brainer. But there are caveats.</p>
<p>First, these largely positive perceptions of culinary school came primarily from students who had gone to the Culinary Institute of America. Attendees of college or for-profit programs, such as the <a href="https://www.eater.com/2015/12/17/10401492/le-cordon-bleu-cooking-school-america-closing">now-shuttered U.S. Le Cordon Bleu campuses</a>, were less pleased about their experience, with just 66% feeling like their degree was worth it, compared with 90% of those I interviewed with degrees from the Culinary Institute of America. While some of this discontent was due to quality of instruction, a large part was related to schools’ prestige.</p>
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<img alt="Blue awning hanging over entrance to three story building reads 'Le Cordon Bleu College of Culinary Arts.'" src="https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=489&fit=crop&dpr=1 600w, https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=489&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=489&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=615&fit=crop&dpr=1 754w, https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=615&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/582649/original/file-20240318-28-1itan2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=615&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Le Cordon Bleu closed all 16 of its U.S. campuses in 2017.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-famed-le-cordon-bleu-culinary-school-plans-to-close-all-news-photo/1245992397?adppopup=true">Walt Mancini/MediaNews Group/Pasadena Star-News via Getty Images</a></span>
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<p>There are about <a href="https://datausa.io/profile/cip/culinary-arts-chef-training">260 culinary programs across the nation</a>. Schools at the top of the hierarchy, such as the Culinary Institute of America and the Institute of Culinary Education, are seen as places where high-status networks can be honed. This is, in part, a result of filtering out those who can’t afford to pay.</p>
<p>A degree from a top school is associated with the high-caliber restaurants and chefs that Leschziner wrote about; a degree from a lesser-known program likely yields far less social and cultural capital.</p>
<p>Second, I spoke only to individuals who still work in the industry, and that’s just a fraction of the culinary school population. Not all who attend remain in the industry. In fact, my interviewees estimated that only one-third of their classmates still cooked professionally. </p>
<p>Those who stick around likely present a more positive take: They had finished school and had found some measure of success <a href="https://jacobin.com/2020/12/restaurant-workers-covid-coronavirus-food-service">in a notoriously brutal industry</a>. Had I spoken to the two-thirds of graduates who had left the industry, this article might read differently.</p>
<p>Finally, because students devote a lot of time and money to an experience that yields little financial return on investment, adopting a rosy outlook on their schooling may smooth over <a href="https://www.britannica.com/science/cognitive-dissonance">any inner turmoil that might arise</a> as they judge themselves and their past decisions.</p>
<h2>A foot in the door</h2>
<p>Determining the value of expensive culinary education is tough. </p>
<p>It can also detract from the very real problem of predatory and overpriced schooling, especially as the cost of higher education – in all forms – <a href="https://educationdata.org/college-tuition-inflation-rate#:%7E:text=The%20average%20annual%20cost%20of,9.24%25%20from%202010%20to%202022.">continues to rise</a>, to the point of excluding large swaths of the population. </p>
<p>What’s clear to me, though, is that finances are not the sole – nor most important – reason why people choose to attend pricey culinary programs. My interviewees viewed culinary school as a social experience, one that provides meaningful networking and cultural opportunities to students and alumni. </p>
<p>As one award-winning chef told me, “If I wouldn’t have gone (to the Culinary Institute of America), I wouldn’t have gotten (my first) job as a personal chef. … Anytime people see (Culinary Institute of America) on the resume – whether it should or shouldn’t – it does open doors. So, I’m really glad I went there.”</p><img src="https://counter.theconversation.com/content/222691/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ellen T. Meiser attended the Culinary Institute of America's Napa campus from 2008 to 2009, where she obtained a certificate in Baking and Pastry. While she had a positive experience, her own opinions and anecdotes are not included in this article. All findings are derived from 50 in-depth interviews with kitchen workers across the US, collected from 2018 to 2020. Additionally, she did not graduate culinary school with student loan debt.</span></em></p>Celebrity chef Gordon Ramsay recently pilloried these institutions for saddling students with debt prior to sending them off into a low-wage industry. But many graduates have no regrets.Ellen T. Meiser, Assistant Professor of Sociology, University of Hawaii at HiloLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2253022024-03-13T14:22:57Z2024-03-13T14:22:57ZFinancial abuse from an intimate partner? Three ways you can protect yourself<p><a href="https://www.divorcelaws.co.za/what-is-financial-abuse.html">Financial abuse</a> occurs when one person takes control over another person’s ability to acquire, use and maintain financial resources. An example is being denied access to your own funds or being forced to deposit your salary into a joint bank account but not having access to the account. It could also take place when large withdrawals are made from joint bank accounts without any explanation. </p>
<p>According to the <a href="https://www.isdj.org.za/">Institute for Social Development and Justice</a>, a South African non-profit company, financial abuse can vary and change shape or form but happens when access to economic opportunities is controlled or limited by an intimate partner. </p>
<p>This can happen when your partner withholds financial information or hides money from you. Another example is when your partner refuses to allow you to work, thereby controlling your ability to earn an income. Or being coerced into paying for most of the household expenses when you earn less than your partner. Alternatively, it can happen when the abuser racks up debt on a credit card, knowing the card is not in their name. </p>
<p>South Africa’s <a href="https://www.justice.gov.za/legislation/acts/2021-014.pdf">Domestic Violence Act</a> identifies financial abuse as a criminal act. Several other African countries, such as Ghana, Kenya, Uganda, Zambia and Zimbabwe also recognise it to be a criminal offence. But it remains largely unprosecuted.</p>
<p>Unfortunately, financial abuse is not a new problem. Over the years, my <a href="https://researchprofiles.canberra.edu.au/en/persons/bomikazi-zeka">research</a> has found that the proper use of financial services can help those in disadvantaged situations to turn income into wealth. But when money is entangled with relationships, it can become a tricky situation to navigate. </p>
<p>Financial abuse can happen to anyone, irrespective of age, gender, marital status, employment status or income levels. When financial abuse occurs, it is women who are more likely to see their financial security threatened should the dynamics in a relationship take a turn for the worse. Women are more likely to experience financial abuse since it can happen in tandem with <a href="https://link.springer.com/article/10.1007/s10896-023-00639-y">other forms of abuse</a>. </p>
<p>When you know the signs, you can put the following three measures in place to increase your financial safety: prevent, prepare and protect. </p>
<h2>Prevent</h2>
<p>Knowing your partner’s financial history is an important starting point in preventing financial abuse. Ask about how they have managed their debt in the past (and how they got into it in the first place) or whether they are actively saving money. </p>
<p>Broaching the money-talk conversation is difficult but this information should give you insight into their past financial behaviours which could influence and explain future financial behaviours. </p>
<p>Another strategy in prevention is asking about their attitudes towards money in relationships. For instance, do they believe that gender roles influence who manages money? Engaging in this topic early can also help you set boundaries about how money is managed within the relationship. </p>
<h2>Prepare</h2>
<p>Learning the signs of financial abuse can help you be prepared. If you suspect that financial abuse is beginning to emerge then keep close tabs on it by documenting all the evidence. This is important because an abuser may gaslight you into thinking you’re exaggerating, especially when the signs are subtle. Document as much evidence as you can and ensure you have copies of all important legal documents as this will help you, should you require legal assistance. </p>
<p>If you don’t already have one, speak to a financial advisor about how you can protect your finances and assets. </p>
<h2>Protect</h2>
<p>As far as possible, keep an independent source of income as this reduces any likelihood of dependency on a partner. Financial dependency can lead to feelings of isolation and hopelessness, which makes it more difficult to leave an abuser because they control the finances. </p>
<p>Another way you can protect your financial position is by making sure you don’t sign any documents you don’t understand. Often abusers will acquire financial assets in their partner’s name and leave them with the financial burden of the repayments, thereby entrapping them through debt. </p>
<h2>Getting help</h2>
<p>While the measures outlined here are not exhaustive, they are a good starting point to think about when your finances are merged with someone else’s. </p>
<p>If you are concerned about your financial safety, there are ways to get help. FIDA-Kenya, a women’s rights organisation in Kenya, offers <a href="https://www.fida-kenya.org/">free legal aid</a>. In Nigeria, the Women at Risk International Foundation operates a 24-hour confidential toll-free <a href="https://warifng.org/contact-us/">helpline</a>. </p>
<p>You can access free counselling from a social worker via the South African Department of Social Development’s <a href="https://gbv.org.za/about-us/">website</a>, which provides a call centre facility 24 hours a day, seven days a week. The call centre operates an emergency line number on 0800 428 428. You can visit the <a href="https://thewarriorproject.org.za/helplines/">website</a> of the Warrior Project, a non-profit organisation, for more information on helplines and resources.</p><img src="https://counter.theconversation.com/content/225302/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When money is entangled with relationships, it can often become a tricky situation.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2222472024-03-13T12:45:24Z2024-03-13T12:45:24ZBuyouts can bring relief from medical debt, but they’re far from a cure<figure><img src="https://images.theconversation.com/files/577693/original/file-20240223-20-aiwmsy.jpg?ixlib=rb-1.1.0&rect=0%2C15%2C5145%2C3462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Medical debt can have devastating consequences.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/stethscope-on-pile-of-us-banknotes-royalty-free-image/153349316">PhotoAlto/Odilon Dimier via Getty Images</a></span></figcaption></figure><p><a href="https://www.kff.org/health-costs/press-release/1-in-10-adults-owe-medical-debt-with-millions-owing-more-than-10000/#:%7E:text=Americans%20Likely%20Owe%20Hundreds%20of,who%20owe%20more%20than%20%2410%2C000.">One in 10 Americans</a> carry medical debt, while <a href="https://www.commonwealthfund.org/publications/issue-briefs/2022/sep/state-us-health-insurance-2022-biennial-survey">2 in 5</a> are underinsured and at risk of not being able to pay their medical bills.</p>
<p><a href="https://doi.org/10.1001/jamanetworkopen.2022.31898">This burden</a> <a href="https://www.commonwealthfund.org/publications/podcast/2023/oct/how-medical-debt-makes-people-sicker-what-we-can-do-about-it">crushes millions</a> <a href="https://doi.org/10.1377/hlthaff.2023.00604">of families</a> under mounting bills and contributes to the <a href="http://doi.org/10.1001/jamanetworkopen.2022.31898">widening gap</a> between rich and poor. </p>
<p>Some relief has come with a wave of debt buyouts by <a href="https://fortune.com/2023/03/10/local-communities-are-buying-medical-debt-for-pennies-on-the-dollar-and-freeing-american-families-from-the-threat-of-bankruptcy/">county and city governments</a>, <a href="https://apnews.com/article/business-georgia-nonprofits-2a5c3afc4a646d489242bd99eb6652fc">charities</a> and even <a href="https://www.wmdt.com/2024/01/chick-fil-a-pays-medical-debt-on-delmarva/">fast-food restaurants</a> that pay pennies on the dollar to clear enormous balances. But as a <a href="https://scholar.google.com/citations?user=cGZVMkoAAAAJ&hl=en">health policy and economics researcher</a> who studies out-of-pocket medical expenses, I think these buyouts are only a partial solution.</p>
<h2>A quick fix that works</h2>
<p>Over the past 10 years, the nonprofit <a href="https://ripmedicaldebt.org/">RIP Medical Debt</a> has emerged as the leader in making buyouts happen, using <a href="https://www.cnn.com/2020/03/01/us/medical-debt-campaigns-give-back-trnd/index.html">crowdfunding campaigns</a>, <a href="https://www.theguardian.com/us-news/2016/jun/06/john-oliver-medical-debt-forgiveness-last-week-tonight">celebrity engagement</a>, and partnerships in the private and public sectors. It connects charitable buyers with hospitals and debt collection companies to arrange the sale and erasure of large bundles of debt. </p>
<p>The buyouts focus on low-income households and those with extreme debt burdens. You can’t sign up to have debt wiped away; you just get notified if you’re one of the lucky ones included in a bundle that’s bought off. In 2020, the U.S. Department of Health and Human Services <a href="https://revcycleintelligence.com/news/hospitals-can-sell-patient-bad-debt-to-charitable-orgs-oig-says">reviewed this strategy</a> and determined it didn’t violate anti-kickback statutes, which reassured hospitals and collectors that they wouldn’t get in legal trouble partnering with RIP Medical Debt. </p>
<p>Buying a bundle of debt saddling low-income families can be a bargain. Hospitals and collection agencies are typically <a href="https://www.wbur.org/onpoint/2023/09/21/buy-and-sell-medical-debt-health-care">willing to sell</a> the debt for <a href="https://www.theatlantic.com/health/archive/2019/08/medical-bill-debt-collection/596914/">steep discounts</a>, even <a href="https://fortune.com/2023/03/10/local-communities-are-buying-medical-debt-for-pennies-on-the-dollar-and-freeing-american-families-from-the-threat-of-bankruptcy/">pennies on the dollar</a>. That’s a great return on investment for philanthropists looking to make a big social impact.</p>
<p>And it’s not just charities pitching in. <a href="https://www.npr.org/sections/health-shots/2024/01/23/1225014618/nyc-joins-a-growing-wave-of-local-governments-erasing-residents-medical-debt">Local governments</a> across the country, from <a href="https://arpa.cookcountyil.gov/medical-debt-relief-initiative">Cook County, Illinois</a>, to <a href="https://www.axios.com/local/new-orleans/2023/05/23/new-orleans-medical-debt-forgiveness">New Orleans</a>, have been directing <a href="https://apnews.com/article/health-care-costs-boston-toledo-e423c64c1322bc8e4254b7a70b1da50c">sizable public funds</a> toward this cause. <a href="https://www.nytimes.com/2024/01/22/nyregion/medical-debt-forgiveness.html">New York City</a> recently announced plans to buy off the medical debt for half a million residents, at a cost of US$18 million. That would be the largest public buyout on record, although Los Angeles County may trump New York if it <a href="https://www.latimes.com/california/story/2023-10-04/la-county-buy-forgive-medical-debt-how-work">carries out its proposal</a> <a href="https://www.cbsnews.com/losangeles/news/la-county-considering-plan-to-erase-medical-debt-for-residents/">to spend</a> $24 million to help 810,000 residents erase their debt.</p>
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<figcaption><span class="caption">HBO’s John Oliver has collaborated with RIP Medical Debt.</span></figcaption>
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<p>Nationally, RIP Medical Debt has helped clear more than <a href="https://ripmedicaldebt.org/about/">$10 billion</a> in debt over the past decade. That’s a huge number, but a small fraction of the estimated <a href="https://www.kff.org/health-costs/issue-brief/the-burden-of-medical-debt-in-the-united-states/">$220 billion</a> in medical debt out there. Ultimately, prevention would be better than cure.</p>
<h2>Preventing medical debt is trickier</h2>
<p>Medical debt has been a persistent <a href="https://files.consumerfinance.gov/f/documents/cfpb_medical-debt-burden-in-the-united-states_report_2022-03.pdf">problem over the past decade</a> even after the reforms of the 2010 Affordable Care Act <a href="http://doi.org/10.1056/NEJMsr1406753">increased</a> <a href="http://doi.org/doi:10.1001/jama.307.9.913">insurance</a> <a href="http://doi.org/doi:10.1001/jama.2015.8421">coverage</a> and <a href="https://doi.org/10.1353/hpu.2020.0031">made a dent</a> in debt, especially in states that <a href="http://doi.org/10.3386/w22170">expanded</a> <a href="http://doi.org/10.1001/jama.2021.8694/">Medicaid</a>. A recent <a href="https://www.commonwealthfund.org/publications/issue-briefs/2022/sep/state-us-health-insurance-2022-biennial-survey">national survey by the Commonwealth Fund</a> found that 43% of Americans lacked adequate insurance in 2022, which puts them at risk of taking on medical debt. </p>
<p>Unfortunately, it’s incredibly difficult to close coverage gaps in the patchwork American insurance system, which ties eligibility to employment, income, age, family size and location – all things that can change over time. But even in the absence of a total overhaul, there are several policy proposals that could keep the medical debt problem from getting worse.</p>
<p><a href="https://www.urban.org/sites/default/files/2022-06/Which%20County%20Characteristics%20Predict%20Medical%20Debt.pdf">Medicaid expansion</a> has been shown to reduce uninsurance, underinsurance and medical debt. Unfortunately, insurance gaps are likely to get worse in the coming year, as states <a href="https://www.kff.org/medicaid/issue-brief/10-things-to-know-about-the-unwinding-of-the-medicaid-continuous-enrollment-provision/">unwind their pandemic-era Medicaid rules</a>, leaving millions without coverage. Bolstering Medicaid access in the <a href="https://www.kff.org/medicaid/issue-brief/status-of-state-medicaid-expansion-decisions-interactive-map/">10 states</a> that haven’t yet expanded the program could go a long way.</p>
<p>Once patients have a medical bill in hand that they can’t afford, it can be tricky to navigate financial aid and payment options. Some states, like <a href="https://medicaldebtpolicyscorecard.org/state/MD">Maryland</a> and <a href="https://medicaldebtpolicyscorecard.org/state/CA">California</a>, are <a href="https://doi.org/10.1001/jama.2021.23061">ahead of the curve</a> <a href="https://medicaldebtpolicyscorecard.org/">with policies</a> that make it easier for patients to access aid and that rein in the use of liens, lawsuits and other aggressive collections tactics. More states could follow suit.</p>
<p>Another major factor driving underinsurance is <a href="https://www.npr.org/sections/health-shots/2022/06/16/1104679219/medical-bills-debt-investigation#:%7E:text=For%20many%20Americans%2C%20the%20combination,slightly%20lower%20than%20the%20uninsured.">rising out-of-pocket costs</a> – like high deductibles – for those with private insurance. This is especially a concern for <a href="https://www.chiamass.gov/assets/docs/r/pubs/2020/High-Deductable-Health-Plans-CHIA-Research-Brief.pdf">low-wage</a> <a href="https://www.ajmc.com/view/financial-burden-of-healthcare-utilization-in-consumer-directed-health-plans">workers</a> who live paycheck to paycheck. More than half of large employers believe their employees <a href="https://www.kff.org/report-section/ehbs-2023-summary-of-findings/#:%7E:text=As%20noted%20above%2C%2025%25%20of,a%20moderate%20level%20of%20concern">have concerns</a> about their ability to afford medical care.</p>
<p>Lowering deductibles and out-of-pocket maximums could protect patients from accumulating debt, since it would lower the total amount they could incur in a given time period. But if the current system otherwise stayed the same, then premiums would have to rise to offset the reduction in out-of-pocket payments. Higher premiums would transfer costs across everyone in the insurance pool and make enrolling in insurance unreachable for some – which doesn’t solve the underinsurance problem.</p>
<p>Reducing out-of-pocket liability without inflating premiums would only be possible if the overall cost of health care drops. Fortunately, there’s room to reduce waste. Americans <a href="https://www.pgpf.org/blog/2023/07/why-are-americans-paying-more-for-healthcare">spend more on health care</a> than people in other wealthy countries do, and arguably get less for their money. <a href="http://doi.org/doi:10.1001/jama.2019.13978">More than a quarter</a> of health spending is on <a href="https://www.brookings.edu/articles/reducing-administrative-costs-in-u-s-health-care/#:%7E:text=Cutler%20proposes%20several%20reforms%20to,in%20the%20health%2Dcare%20system.">administrative</a> <a href="http://doi.org/10.1111/1475-6773.13649">costs</a>, and the <a href="https://doi.org/10.1377/hlthaff.2018.05144">high prices</a> Americans pay don’t necessarily translate into <a href="https://www.doi.org/10.1001/jama.2019.13978">high-value care</a>. That’s why some states like <a href="https://www.milbank.org/publications/the-massachusetts-health-care-cost-growth-benchmark-and-accountability-mechanisms-stakeholder-perspectives/">Massachusetts</a> and <a href="https://hcai.ca.gov/get-the-facts-about-the-office-of-health-care-affordability/">California</a> are experimenting with <a href="https://www.chcf.org/wp-content/uploads/2022/04/HealthCareCostCommissionstatesAddressCostGrowth.pdf">cost growth limits</a>.</p>
<h2>Momentum toward policy change</h2>
<p>The growing number of city and county governments buying off medical debt signals that local leaders view medical debt as a problem worth solving. Congress has passed substantial <a href="https://www.cms.gov/priorities/key-initiatives/hospital-price-transparency">price transparency laws</a> and prohibited <a href="https://www.cms.gov/nosurprises">surprise medical billing</a> in recent years. The Consumer Financial Protection Bureau is <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-kicks-off-rulemaking-to-remove-medical-bills-from-credit-reports/">exploring rule changes</a> for medical debt collections and reporting, and national credit bureaus have <a href="https://www.urban.org/urban-wire/medical-debt-was-erased-credit-records-most-consumers-potentially-improving-many">voluntarily removed</a> some medical debt from credit reports to limit its impact on people’s approval for loans, leases and jobs. </p>
<p>These recent actions show that leaders at all levels of government want to end medical debt. I think that’s a good sign. After all, recognizing a problem is the first step toward meaningful change.</p><img src="https://counter.theconversation.com/content/222247/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erin Duffy receives funding from Arnold Ventures. </span></em></p>Local governments are increasingly buying – and forgiving – their residents’ medical debt.Erin Duffy, Research Scientist, University of Southern CaliforniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2243802024-03-04T13:28:02Z2024-03-04T13:28:02ZCost-of-living crisis: experts share 3 survival tips<p>The price increases for essential goods such as food, petrol and household utilities are a global concern, but the region most hurt by the <a href="https://www.imf.org/external/pubs/ft/ar/2023/in-focus/cost-of-living-crisis/#:%7E:text=The%20IMF%20heightened%20its%20efforts,the%202008%20global%20financial%20crisis.">surge in food prices</a> is sub-Saharan Africa. The knock-on effect from the supply chain disruption caused by the COVID-19 pandemic, climate disasters that resulted in food insecurity and energy shortages have driven prices through the roof.</p>
<p>A report by <a href="https://www.numbeo.com/cost-of-living/rankings_by_country.jsp?title=2024&region=002">Numbeo</a>, which contains the world’s largest database on costs of living, found that South Africa is the ninth most expensive African country to live in and the most expensive in cost of living (in terms of groceries, transport, utilities and restaurants) in southern Africa. The index shows Côte d'Ivoire is the African country with the highest cost of living, followed by Senegal, Ethiopia, Mozambique and Mauritius. </p>
<p>Consumers have had to cope with food prices by meal planning or buying in bulk to save money. Unilever’s food group <a href="https://www.news24.com/news24/bi-archive/south-african-consumer-go-on-tight-budgets-to-keep-meat-on-their-plate-2022-5">Knorr</a> found that the average South African was also skipping breakfast and eating two meals on weekdays, and only having breakfast during the weekend. </p>
<p>After years of researching <a href="https://researchprofiles.canberra.edu.au/en/persons/bomikazi-zeka/publications/">personal finance</a> and <a href="https://scholar.google.com.au/citations?user=f2301MMAAAAJ&hl=en&oi=ao">development finance</a>, we have taken a keen interest in understanding how consumers manage their resources to overcome economic challenges, such as the cost-of-living crisis. Now is a good time to be financially prudent and plan for how you can keep afloat during these tough times. </p>
<p>It’s important to know how to manage the cost-of-living crisis, whether it’s by getting out of debt, being strategic about how you save or tracking the expenses that consume a big chunk of your income. Keeping an eye out for where you can boost your savings or reduce expenses can make a significant difference to your financial wellbeing. </p>
<p>Since everyone’s financial situation is different, none of this should be taken as financial advice. It’s always best to speak to an authorised financial service provider. Some of these suggestions may only be helpful to individuals with access to banking services and those earning a regular income. With these provisos in mind, we unpack three areas to consider when managing the cost-of-living crisis.</p>
<h2>1. Consolidate your expenses</h2>
<p>Review where you’re paying for the same expense twice. A good example is bank fees. If you’re banking with more than one bank, then chances are you’re paying bank fees for similar transactions across different banks. By housing your finances with one bank, you can reduce bank fees. </p>
<p>Another example is subscriptions for streaming services. Consider how many accounts like Netflix, YouTube Premium, AppleTV and Showmax you have, and ask yourself: how many of them do you really spend time watching? All the fees add up. As Benjamin Franklin, the former US statesman, once put it: “Beware of little expenses. A small leak will sink a great ship.”</p>
<h2>2. Clear debt</h2>
<p>Since the cost-of-living crisis plunged more South African households into indebtedness, Nedbank’s Financial Health <a href="https://moneyedge.co.za/content/dam/moneyedge-2-0/money-conversations/NEDFIN-Health-Monitor-Report.pdf">Report</a> found that almost 50% of South Africans believe it is okay to take on debt to cover household expenses such as groceries, clothing, furniture, appliances, electricity and water. In <a href="https://www.ft.com/content/2dbc240e-328a-452b-9347-5091d74f4003">Nigeria</a>, too, consumers are turning to loans to cover daily expenses as inflation rates rise. </p>
<p>Taking on more debt when living expenses are on the rise can easily sink you deeper into the debt hole. Instead, coming up with a plan to pay off debts will eventually free up your cash flows. </p>
<p>There are two strategies to try: the debt snowball approach or the debt avalanche method. </p>
<p>The debt snowball approach prioritises paying off your smallest debts first, before moving on to larger loans. Seeing your debt clearing up motivates you.</p>
<p>The debt avalanche approach tackles the debts with the highest interest rate first and will thus save you the most money as your high interest repayments are eliminated. </p>
<p>Whichever approach you decide to use, seek the opinion of a professional financial advisor. </p>
<h2>3. Compartmentalise your savings</h2>
<p>Saving provides financial security and a buffer for unplanned financial expenses. And it helps you reach your financial goals. While households with intermittent income are more likely to struggle with building up savings, opportunities to save may come in the form of reducing shopping costs, like switching to supermarket brands (which tend to be cheaper) or buying refills for household cleaning products. </p>
<p>In general, most people who actively save keep their savings for holidays, emergency funds, future purchases and long-term goals all in the same account. The problem with this approach is that when you need to withdraw from the savings account, you don’t know which part of your savings you’re withdrawing from. </p>
<p>One way to organise your savings is by separating them into the categories you are saving for. This could be done in a spreadsheet that shows how much you have saved for each category. You can clearly see how your savings for each goal are growing, which encourages you to keep the savings momentum going. </p>
<p>If you’re interested in taking this a step further, budgeting apps such as <a href="https://www.22seven.com/">22seven</a> create personalised budgets based on your actual spending patterns. This free app allows you to set limits for what you want to spend and tracks how much you’ve already spent.</p>
<p>For example, you can decide what you plan to spend for lifestyle expenses (such as dining out or shopping) and receive a notification when you are close to reaching your spending limit. But it’s important to practise some self-discipline and not overspend once those funds are depleted. And while this may seem like yet another app that needs to be installed, think of how easy it is to tap your debit card when going about your day and spending more than you had planned. </p>
<p>Sometimes we need to put measures in place to save ourselves from ourselves, and this is one of them.</p><img src="https://counter.theconversation.com/content/224380/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Keeping an eye out for where you can boost your savings or reduce expenses when times are tough can improve your financial wellbeing.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraAbdul Latif Alhassan, Professor of Development Finance & Insurance, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2177792024-01-17T19:07:47Z2024-01-17T19:07:47ZWhat are ‘good’ and ‘bad’ debts, and which should I pay off first?<p>With the cost of living soaring and many struggling to get a pay rise, it’s not surprising people are using debt to navigate life’s financial twists and turns.</p>
<p>Owing money can sometimes feel challenging, but not all debts should keep you awake at night.</p>
<p>So which debts are good and which are bad? And in what order should you pay them off? As it all depends on your personal circumstances, all I can offer is general information and not financial advice. Ideally, you should seek guidance from an accredited financial adviser. But in the meantime, here are some ideas to consider.</p>
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Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
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<h2>What is a ‘good debt’?</h2>
<p>Good debts can be strategic tools and help build a solid foundation for your future. They usually increase your net worth by helping you generate income or buy assets that increase in value. </p>
<p>With good debts, you usually get back more than what you pay for. They usually have lower interest rates and longer repayment terms. But personal finance is dynamic, and the line between good and bad debt can be nuanced. If not managed properly, even good debts can cause problems. </p>
<p>Some examples of “good debts” might include:</p>
<p><strong>Mortgages</strong>: A mortgage allows you to buy a house, which is an asset that generally increases in value over time. You may potentially get tax advantages, such as <a href="https://www.ato.gov.au/forms-and-instructions/rental-properties-2023/other-tax-considerations">negative gearing</a>, through investment properties. However, it’s crucial not to overstretch yourself and turn a mortgage into a nightmare. As a rule of thumb, try avoid spending <a href="https://www.cnbc.com/select/mortgage-affordability/">more than 30% of your income</a> per year on your mortgage repayments.</p>
<p><strong>Student loans</strong>: Education is an investment in yourself. Used well, student loans (such as <a href="https://www.studyassist.gov.au/help-loans/hecs-help">HECS-HELP</a>) can be the ticket to a higher-paying job and better career opportunities.</p>
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<a href="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman in a hijab looks at her phone." src="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Review the terms and conditions of any loans carefully.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-muslim-woman-wears-hijab-black-2252700881">Shutterstock</a></span>
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<h2>What is a ‘bad debt’?</h2>
<p>“Bad debts” undermine your financial stability and can hinder your financial progress. They usually come with high interest rates and short repayment terms, making them more challenging to pay off. They can lead to a vicious cycle of debt. </p>
<p>Examples of bad debts include:</p>
<p><strong>Payday loans</strong>: A payday loan offers a quick fix for people in a financial tight spot. However, their steep interest rates, high fees and tight repayment terms often end up worsening a person’s financial problems. The interest and fee you may end up paying can get close to the loan amount itself.</p>
<p><strong>Credit card debt:</strong> Credit cards can be like quicksand for your finances. If you don’t pay off your purchase on time, you’ll be subject to an annual interest rate of around <a href="https://www.rba.gov.au/statistics/tables/">19.94%</a>. For a A$3,000 credit card debt, for example, that could mean paying nearly $600 annual interest. Carrying credit card debt from month to month can lead to a seemingly never-ending debt cycle.</p>
<p><strong>Personal loans:</strong> People usually take personal loans from a bank to pay for something special, such as a nice holiday or a car. They often come with higher interest rates, averaging around <a href="https://www.finder.com.au/personal-loans">10%</a>. Spending money that you don’t have can lead to prolonged financial headaches.</p>
<p><strong>Buy-now-pay-later services:</strong> Buy-now-pay-later services often provide interest-free instalment options for purchases. This can be tempting, but the account fees and late payment fees associated with buy-now-pay-later services can lead to a long-term financial hangover. The convenience and accessibility of buy-now-pay-later services can also make it easy to get further and further into debt.</p>
<h2>So in what order should I pay off my debts?</h2>
<p>There is no one right answer to this question, but here are three factors to consider.</p>
<p><strong>Prioritise high-interest debts</strong>: Start by confronting the debts with the highest interest rates. This typically includes credit card debt and personal loans. Paying off high-interest debts first can save you money and reduce your total debt faster.</p>
<p><strong>Negotiate interest rates or switch lenders:</strong> Don’t be shy. A simple call to your lender requesting a lower rate can make a significant difference. You may also take advantage of sign-on offers and refinancing your loan with a new lender. In the banking business, customers are not usually rewarded for their loyalty.</p>
<p><strong>Consider different repayment strategies:</strong> Choose a debt repayment strategy that aligns with your preferences. Some people get a psychological boost from paying off smaller debts first (this is often called the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">snowball method</a>”). Others focus on high-interest debts (often known as the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">avalanche method</a>”). Find what works for you. The most important thing is to have a plan and stick to it.</p>
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<a href="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An older man speaks on the phone." src="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Don’t be afraid to call your lender and ask for a lower interest rate.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pensive-mature-man-communicating-someone-over-1656926761">Shutterstock</a></span>
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<p>Review the terms of each debt carefully. Certain loans offer flexibility in repayment schedules, while others may impose penalties for early settlement. Take note of these conditions as you develop your repayment plan.</p>
<p>Debt can be a useful tool or a dangerous trap, depending on how you use it. By understanding the difference between good and bad debts, and by having a smart strategy for paying them off, you can take charge of your financial future.</p>
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Read more:
<a href="https://theconversation.com/many-students-dont-know-how-to-manage-their-money-here-are-6-ways-to-improve-financial-literacy-education-177918">Many students don't know how to manage their money. Here are 6 ways to improve financial literacy education</a>
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<img src="https://counter.theconversation.com/content/217779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angel Zhong does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Feel like you’re drowning in debt? Owing money can sometimes be challenging, but not all debts should keep you awake at night.Angel Zhong, Associate Professor of Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2181262023-12-28T20:37:40Z2023-12-28T20:37:40ZCould you cope with a shock to your bank balance? 5 ways to check you are financially resilient<p>Imagine the dentist has just said you urgently need a A$2,000 dental crown. A week later, a pipe in your bathroom bursts, causing $8,000 worth of damage. Suddenly, you’ve been hit with a $10,000 financial shock.</p>
<p>As the cost-of-living crisis plunges more households into financial uncertainty and at least <a href="https://melbourneinstitute.unimelb.edu.au/data/taking-the-pulse-of-the-nation-2022/2023/australians-face-challenging-budgetary-constraints#:%7E:text=Over%20the%20past%20six%20months,has%20increased%20to%2060%20percent.">one-third</a> of Australians struggle to make ends meet, it’s more important than ever to ask yourself: how financially resilient am I?</p>
<p>Being financially resilient means you aren’t left financially devastated when an expensive emergency creeps up on you. Here are five key signs of financial resilience.</p>
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<a href="https://theconversation.com/kids-and-money-five-ways-to-start-the-conversation-193632">Kids and money: five ways to start the conversation</a>
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<h2>1. You have a plan for what you’d do if you suddenly lost your salary</h2>
<p>Financial resilience means having a plan to fall back on during tough times. This extends to how you’d make money if you lost your job.</p>
<p>In practice, that means things like making sure your skills and contacts are kept up to date so you can more easily find a new job. You might also consider whether a “side hustle” job such as tutoring could work for you in the short term, and how you’d put that plan into practice if needed. Perhaps you have a spare room in your home you could rent out for a period of time if you lost your salary. </p>
<p>Those examples won’t work for everyone, of course, but it’s still worth asking yourself the question: what would I do if I lost my salary tomorrow?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A worried father looks at his phone while his daughter sits in the background." src="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s good to think about how you’d handle a difficult financial situation – well before disaster strikes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-father-looking-smart-phone-holding-482556850">Shutterstock</a></span>
</figcaption>
</figure>
<h2>2. You have enough liquid assets to meet an unexpected financial expense</h2>
<p>Liquid assets means money that can be accessed quickly and easily to overcome an unplanned financial expense. Savings are a good example. They provide a buffer so you can cope in the short term if a financial shock strikes. The federal government’s Moneysmart website suggests you aim to have enough in your emergency savings fund to cover <a href="https://moneysmart.gov.au/saving/save-for-an-emergency-fund">three months of expenses</a>.</p>
<p>Having an <a href="https://moneysmart.gov.au/glossary/offset-account">offset account</a> as part of a mortgage is another option that provides a buffer. Putting money in an offset account helps you save while reducing the amount of interest on a home loan. You can still access the money in an offset account at any time.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1712058155063022023"}"></div></p>
<h2>3. You have bought the right financial products, such as insurance</h2>
<p>Financial products, such as insurance, hedge against potential losses.</p>
<p>Personal insurance is important because it provides income in the event of death, illness or injury. Examples include:</p>
<ul>
<li><p>life insurance (which pays out to your beneficiaries, such as your partner or children, when you die)</p></li>
<li><p>total and permanent disability insurance (which means you may get some money if you acquire a disability that prevents you from working)</p></li>
<li><p>income protection (which provides you with an income if you can no longer work)</p></li>
<li><p>trauma cover (which covers a life-changing illness or injury, such as cancer or a stroke).</p></li>
</ul>
<p>Check if your superannuation has any of these insurances included in it. <a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">Research</a> has found that many Australians are underinsured.</p>
<h2>4. You can still pay your debts when times are tough</h2>
<p>Being able to borrow money can help when you’re in a tight spot. But knowing where to borrow from, how much to borrow and how to manage debt repayments is crucial.</p>
<p>Financially resilient people use debt responsibly. That means: </p>
<ul>
<li><p>not using debt for frivolous expenses like after-work drinks </p></li>
<li><p>staying away from private money lenders</p></li>
<li><p>being cautious about buy-now-pay-later services</p></li>
<li><p>watching out for debts with high interest rates, such as payday loans and credit card debt</p></li>
<li><p>maintaining debt repayments consistently.</p></li>
</ul>
<p>If you’re having debt problems, talk to your lender about renegotiating your repayment arrangements, or contact the <a href="https://ndh.org.au/">National Debt Helpline</a> on 1800 007 007.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at her computer while holding a credit card." src="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Credit card debt can come with high interest rates.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/concentrated-millennial-generation-african-multiracial-woman-1978757975">Shutterstock</a></span>
</figcaption>
</figure>
<h2>5. You are financially literate</h2>
<p>Being financially literate means you can assess the benefits and risks of using savings or taking out debt to meet an unplanned financial need. </p>
<p>As I have <a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">written</a> before on The Conversation, key signs of financial literacy include tracking your cashflow, building a budget, as well as understanding what debts you have and which to pay first. </p>
<p>It also means storing your money across different places (such as superannuation, savings accounts, property and the share market) and understanding how financial assets like cash, shares and bonds work.</p>
<p>Being aware of your financial strengths and weaknesses, and having financial goals is also important.</p>
<p>Nobody is born knowing how to make sound financial decisions; it’s a skill that must be learned. </p>
<p>It’s good to think about the resources you would draw upon to help get yourself out of a difficult financial situation – well before disaster strikes.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/battling-to-make-ends-meet-financial-planning-expert-offers-5-tips-on-how-to-build-your-budget-214861">Battling to make ends meet? Financial planning expert offers 5 tips on how to build your budget</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/218126/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Being financially resilient means you aren’t left financially devastated when an expensive emergency creeps up on you.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2176402023-12-04T13:28:30Z2023-12-04T13:28:30ZCertain states, including Arizona, have begun scrapping court costs and fees for people unable to pay – two experts on legal punishments explain why<figure><img src="https://images.theconversation.com/files/562784/original/file-20231130-19-9k4bbs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Several U.S. states are eliminating criminal fines and fees for people who can't afford them. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/dollars-bills-with-law-gavel-legal-issues-royalty-free-image/1479990448?phrase=excessive+courts+costs+US&adppopup=true">Getty Images</a></span></figcaption></figure><p>In today’s American criminal legal system, courts impose fines and fees as a means to punish people and hold them accountable for legal violations. </p>
<p>At times, people are sentenced to pay without incarceration, but frequently people across the U.S. are sentenced to both jail time and fiscal penalties. <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1745-9133.12442">Those costs</a> are assessed by individual courts and include processing and filing charges, jury fees and fiscal penalties such as interest charges and late penalty fees. The collected money is then used to pay for costs such as the administration of court-appointed attorneys, probation, detention and diversion programs.</p>
<p>But these fines and fees are often levied without any consideration for an individual’s ability to pay – and <a href="https://www.thecharlottepost.com/news/2023/10/11/local-state/how-north-carolina-turns-the-poor-into-criminals/">can add up</a> to thousands of dollars. Given the potential consequences of legal debt on people unable to pay, including the loss of the right to vote and further criminal infractions, we conducted a <a href="https://www.rsfjournal.org/content/8/2/1/tab-article-info">multistate study</a> on the impact of fines and fees.</p>
<p>What we found is that these types of sanctions do not improve public safety or serve as an effective deterrent in reducing further crime. More troubling is that the negative consequences of fines and fees are disproportionately felt by people of color and those who are poor. </p>
<p>Because of these potential financial hardships and adverse effects, U.S. lawmakers have begun to limit the types and amounts of fines and fees that can be charged.</p>
<h2>What the research shows</h2>
<p>In <a href="https://doi.org/10.7758/RSF.2022.8.2.01">our study of eight states</a> – California, Illinois, Minnesota, New York, Washington, Georgia, Missouri and Texas – we found extreme variations in how court-imposed fines and fees were used.</p>
<p>Some states had <a href="https://www.rsfjournal.org/content/8/1/221">statutes mandating a minimum amount</a> of fines and fees to be imposed on people for specific crimes and infractions; other states did not. Some local judges sentenced people unable to pay to jail as a violation of their sentence; other judges in different counties within the same state did not. To collect outstanding debts, some states <a href="https://www.rsfjournal.org/content/8/1/82">even sued</a> formerly incarcerated people for the cost of their room and board; other states did not.</p>
<p>In Allegheny County, Pennsylvania, for instance, <a href="https://doi.org/10.1177/1541204016669213">our research</a> there showed that financial burden increased the chances among juvenile offenders to commit additional crimes within two years of their initial arrests.</p>
<p>In another statewide <a href="https://journals.sagepub.com/doi/abs/10.1177/15412040231180816?journalCode=yvja">study in Florida</a>, we found that fees increased recidivism and, in particular, that Black youth with restitution fees had a higher recidivism likelihood. Our study further found that Black and Hispanic youth tended to receive higher fees compared to white youth regardless of the alleged crimes. The average fees for Black juveniles was US$709.50, and $633.30 for Hispanic youths. In stark contrast, the average fees for white juveniles was $426.50.</p>
<p>A wealth of <a href="https://www.rsfjournal.org/content/8/1/221">research has illustrated</a> how unpaid court fines and fees force people to make decisions regarding <a href="https://www.rsfjournal.org/content/8/2/57">housing</a>, <a href="https://www.rsfjournal.org/content/8/2/36">medical care</a>, education and even food and <a href="https://www.russellsage.org/publications/pound-flesh">medication</a>. </p>
<p>In an <a href="https://www.justice.gov/opa/pr/justice-department-issues-dear-colleague-letter-courts-regarding-fines-and-fees-youth-and">April 23, 2023, letter</a>, the U.S. Department of Justice warned court officials and state agencies that <a href="https://www.washingtonpost.com/national-security/2023/04/22/justice-department-fines-pardons-gupta/">imposing fines and fees</a> on offenders who cannot pay may result in them losing their jobs, driver’s license, right to vote or even their home. </p>
<h2>Changes across the country</h2>
<p>Depending on the crime, Arizona juveniles and their parents faced <a href="https://www.azcourts.gov/selfservicecenter/Juvenile-Law/Vacating-Juvenile-Monetary-Obligations#Vacated">a slew of costs</a>, including probation supervision fees, family counseling services, drug and alcohol screenings and even a $25 administrative fee for court-appointed attorneys.</p>
<p>But <a href="https://legiscan.com/AZ/text/SB1197/2023">a new law</a> says they don’t have to pay any of those anymore. </p>
<p>Though the law does not put an end to fines relating to restitution charges or driving under the influence of alcohol charges, it does eliminate all fees assessed by a juvenile court — for court-appointed attorneys, probation, detention and diversion programs.</p>
<figure class="align-center ">
<img alt="A white woman stands in front of an American flag as she delivers a speech." src="https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562549/original/file-20231129-23-wg1e6n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Arizona Gov. Katie Hobbs has eliminated various fines and fees for juvenile offenders.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/arizona-gov-katie-hobbs-gives-a-brief-speech-prior-to-news-photo/1695716056?adppopup=true">Rebecca Noble/Getty Images</a></span>
</figcaption>
</figure>
<p>Arizona was not alone. Indiana, Illinois, Montana, California, Louisiana, New Jersey, New Mexico, Oregon, Texas and Virginia have also enacted similar laws that eliminate or reduce juvenile fines and fees. </p>
<p>As these states have learned, monetary sanctions do far more harm than good and inflict disproportionate hardship on those least able to pay them. </p>
<p>“These fees put unnecessary financial stress on children and their families when they should be focused on rehabilitation,” <a href="https://gilavalleycentral.net/governor-hobbs-signs-bill-relieving-arizona-families-from-excessive-legal-fees/">Arizona Gov. Katie Hobbs</a> said in October 2023. “They hold individuals back at a time in their life when what they really need is help moving forward.”</p><img src="https://counter.theconversation.com/content/217640/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexes Harris receives funding from Arnold Ventures. She is affiliated with the Fines and Fees Justice Center as a board member.
Dr. Harris is the chair of the Washington State Advisory Committee to the U.S. Commission on Civil Rights (non-partisan, Federally appointed). She is also the faculty regent to the University of Washington Board of Regents. </span></em></p><p class="fine-print"><em><span>Alex R. Piquero received funding from Arnold Ventures to undertake the study in Florida referred to in the article. Professor Piquero receives no funding at this time from any sources and no external sources of funding were used to prepare this piece. </span></em></p>The imposition of fines and fees on people unable to pay has had a disproportionate impact on Black and Latino communities.Alexes Harris, Professor of Sociology, University of WashingtonAlex R. Piquero, Professor of Sociology & Criminology and Arts & Sciences Distinguished Scholar, University of MiamiLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2183132023-11-23T17:24:29Z2023-11-23T17:24:29ZFinancial crises damage people’s mental health – our global review shows who is worst affected<figure><img src="https://images.theconversation.com/files/560841/original/file-20231121-4482-cd2rlp.jpg?ixlib=rb-1.1.0&rect=317%2C238%2C6929%2C4547&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/depressed-business-man-looking-down-falling-751698157">pathdoc/Shutterstock</a></span></figcaption></figure><p>Financial crises are periods characterised by devastating losses of income, work, a certain future, and a stable family life. The effect on mental health can be catastrophic. But what does the evidence tell us about who is most at risk, and in what ways?</p>
<p>We are the first team to do a systematic <a href="https://www.tandfonline.com/doi/full/10.1080/09638237.2023.2278104">review of global research linking financial crises and mental harms</a>. The evidence from almost 100 eligible studies (out of nearly 7,000 we considered) shows that these crises have consistent, long-term negative effects on the wellbeing of whole groups of people, including increases in depression, anxiety and risk of suicide.</p>
<p>But <a href="https://www.bps.org.uk/news/bps-responds-new-government-back-work-plan">not everyone is affected equally</a>. Your gender, age, job and whether you have a family are all key factors in determining how vulnerable you are to the stress and poor mental health associated with financial loss and insecurity.</p>
<hr>
<p><em>Across the world, we’re seeing unprecedented levels of mental illness at all ages, from children to the very old – with huge costs to families, communities and economies. <a href="https://theconversation.com/uk/topics/tackling-the-mental-health-crisis-147216?utm_source=TCUK&utm_medium=ArticleTop&utm_campaign=MentalHealthSeries">In this series</a>, we investigate what’s causing this crisis, and report on the latest research to improve people’s mental health at all stages of life.</em></p>
<hr>
<p><a href="https://doi.org/10.1186/s12888-015-0608-5">Manual workers</a> (such as farmers, tradespeople and those working minimum-wage jobs) are vulnerable as they typically have less of a safety net, while <a href="https://www.researchgate.net/profile/Susannah-Minutillo/publication/340673303_Small_Business_Ownership_and_Mental_Health/links/602334f292851c4ed55eb474/Small-Business-Ownership-and-Mental-Health.pdf">small business owners</a> are particularly susceptible to financial pressures and worries. </p>
<p><a href="https://doi.org/10.1136/bmj.f5239">People at either end of the age spectrum</a> are also more vulnerable as they have fewer resources. Others at higher risk include <a href="https://doi.org/10.1002/ajim.22210">families</a>, <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4399497/">people with lower levels of formal education</a>, and those with <a href="https://www.bma.org.uk/media/6520/the-country-is-getting-sicker-bma.pdf">long-term health conditions</a>.</p>
<p>Suicide mortality rates <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4473496/#:%7E:text=CONCLUSION%3A%20Economic%20recession%20periods%20appear,particularly%20in%20low%20income%20countries.&text=Core%20tip%3A%20This%20review%20provides,suicide%20at%20the%20ecological%20level.">increase</a> both during and after periods of financial crisis – a risk that is always <a href="https://www.priorygroup.com/blog/why-are-suicides-so-high-amongst-men">higher among men</a>. </p>
<p>However, <a href="https://www.mentalhealth.org.uk/explore-mental-health/a-z-topics/women-and-mental-health">women</a> are more at risk of suffering poorer mental health in general during a financial crisis, as they tend to take on more responsibilities both at work and home – including <a href="https://theconversation.com/emotional-labour-what-it-is-and-why-it-falls-to-women-in-the-workplace-and-at-home-195965">increased emotional labour</a> supporting others who may be struggling financially.</p>
<h2>Stigma, stress and social roles</h2>
<p>Our research highlights three broad challenges to the mental wellbeing of people struggling in a financial crisis. Understanding how to address them could help make people more psychologically resilient in the face of future financial downturns. Here are some recommendations based both on the study’s findings and our combined research knowledge and expertise in health psychology.</p>
<p><strong>1. Social stigma and support</strong></p>
<p>The stigma of mental illness is decreasing in many societies, as we’ve become <a href="https://www.letstalkcampaign.com/">more comfortable talking about our wellbeing</a>. It’s less clear, though, if we are okay talking about our finances. Encouraging people to be more open about financial distress with trusted friends, family members and partners, free of any judgment, can be especially important during periods of economic uncertainty.</p>
<p><a href="https://doi.org/10.1111/bjop.12448">Higher levels of trust in other people</a> offer another defence against mental distress during periods of financial crisis. The reduced stigma around discussing mental health and suicide can buffer against some of the most devastating outcomes. Research shows that talking about suicide can <a href="https://doi.org/10.1017/s0033291714001299">save lives</a>.</p>
<p><strong>2. Stress and insecurity from loss of resources</strong></p>
<p>Even if your job feels secure, financial downturns can lead to <a href="https://doi.org/10.1016/j.ehb.2019.02.008">increasing pressures at work</a> as a result of greater workloads and reduced staff. </p>
<p>If you are an employee, check whether your employer subscribes to an <a href="https://www.hrdept.co.uk/services/employee-assistance-programme/">employee assistance programme</a> that delivers legal and financial advice and psychological support when needed. </p>
<p>Alternatively, <a href="https://www.tuc.org.uk/join-a-union">join a union</a> – most provide legal advice and financial support. Practical support for business owners is <a href="https://www.gov.uk/browse/business/finance-support">also</a> <a href="https://www.gov.uk/browse/business/finance-support">available</a>.</p>
<p>When feeling threatened with loss of income or job security, connecting with people in similar positions both in-person and online, such as via <a href="https://www.mumsnet.com/">parent groups</a>, can help you feel you’re not alone and is a good way of sharing resources. You should also be able to get help from your <a href="https://www.gov.uk/cost-living-help-local-council">local council</a>.</p>
<p><strong>3. Challenges to identity, social roles and meaning</strong></p>
<p>Losing your job or income understandably damages your sense of self. But identity and meaning can be found in various aspects of life, not only work. </p>
<p>Be careful not to think of yourself as “just one thing” – whether a breadwinner or a carer – as this can create a sense of fragility. Strive to <a href="https://positivepsychology.com/live-meaningful-life/">find greater meaning</a> through family, hobbies, organisations and community work.</p>
<p>And we all need to encourage understanding that it’s not the sole responsibility of women to be the <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4804270/">emotional caregivers</a> in families and other care situations – a perception that can damage their sense of identity. <a href="https://journals.sagepub.com/doi/full/10.1177/09500170221096586">Household work and childcare</a> should be divided as evenly as possible at all times, but especially among periods of crisis when people are feeling highly stressed.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A line of depressed men slumped on a bench in front of a city street" src="https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=478&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=478&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=478&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=601&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=601&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560846/original/file-20231121-19-5nbtox.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=601&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The enduring pain of the Great Depression.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Service-pnp-cph-3a30000-3a30000-3a30400-3a30490r.jpg">Mark Benedict Barry via Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Saving lives and the economy</h2>
<p>Declines in mental health should not be regarded as an unavoidable cost of financial crises – this is wrong economically as well as morally. Supporting a nation’s wellbeing could <a href="https://www.lse.ac.uk/News/Latest-news-from-LSE/2022/c-Mar-22/Mental-health-problems-cost-UK-economy-at-least-118-billion-a-year-new-research">save a struggling economy billions</a> by reducing mental illness-related sickness and disability, and ensuring that optimal work practices can continue.</p>
<p>Our review highlights that the way societies are structured affects the impact of financial crises on their populations’ mental health. It is perhaps not surprising, for example, that countries with particularly strong welfare systems, such as Iceland, reported <a href="https://doi.org/10.1093/eurpub/ckaa121">minimal to no increases in suicide rates following a financial crisis</a>.</p>
<p>At a national level, having <a href="https://doi.org/10.1186/s12889-017-4702-0">strong welfare</a>, <a href="https://doi.org/10.2471%2FBLT.20.273383">accessible health services</a> and <a href="https://doi.org/10.3389/fpsyt.2017.00035">progressive attitudes towards mental health</a> are shown to reduce suicide and mental illness. On an individual basis, reaching out to others, having supportive social networks, rethinking our identities and developing financial knowledge may help us all weather current and future crises.</p>
<p>Whatever stage in life you are in, it’s a good idea to familiarise yourself with available mental health services. In the UK, for professional help, contact your GP, use the <a href="https://www.nhs.uk/mental-health/social-care-and-your-rights/how-to-access-mental-health-services/">NHS e-referral platform</a> or check out the <a href="https://www.nhs.uk/mental-health/talking-therapies-medicine-treatments/talking-therapies-and-counselling/nhs-talking-therapies/">NHS talking therapies services</a>. Charities and organisations such as <a href="https://www.mind.org.uk/">Mind</a>, <a href="https://www.samaritans.org/">Samaritans</a> and the <a href="https://www.mentalhealth.org.uk/explore-mental-health/a-z-topics/online-mental-health-support">Mental Health Foundation</a> also provide expert advice and professional support.</p><img src="https://counter.theconversation.com/content/218313/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Our global review of research into the link between financial crises and mental health highlights three key challenges: stigma, stress and social rolesBen Gibson, Lecturer in Applied Psychology, De Montfort UniversityJekaterina Schneider, Research Fellow, University of the West of EnglandMark Forshaw, Professor of Health Psychology, Edge Hill UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2171442023-11-13T16:36:50Z2023-11-13T16:36:50ZYoung people’s reluctance to talk about money is putting them at risk – here’s how to help them<figure><img src="https://images.theconversation.com/files/559048/original/file-20231113-29-3i07wn.jpg?ixlib=rb-1.1.0&rect=0%2C2%2C1000%2C663&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/couple-managing-debt-1050973406">Rawpixel.com/Shutterstock</a></span></figcaption></figure><p>Credit is an everyday, and <a href="https://www.cambridge.org/core/journals/journal-of-social-policy/article/abs/lived-experience-of-financialization-at-the-uk-financial-fringe/313183E8F34A47D046127DC416B88F8F">often essential</a>, part of young people’s lives. Gaining access to credit for the first time is an important transition to adulthood that can enable you to study, earn and invest in your future. </p>
<p>Previously, most people’s first taste of debt was either a loan for university fees, a student overdraft or a credit card. Younger generations are now <a href="https://www.statista.com/statistics/1181682/bnpl-user-age-in-uk/">much more likely</a> to use new forms of credit such as buy now, pay later (BNPL) – a kind of credit often offered at online check-outs that allows people to borrow the cost of their shopping and repay it in instalments.</p>
<p>But confusion about <a href="https://journals.sagepub.com/doi/10.1016/j.ausmj.2011.05.007">the long-term consequences of building up debt</a> is common – and is often compounded by a reluctance to talk about money and debt. This is deeply problematic. Decisions about credit can affect financial wellbeing now and in the future. </p>
<p>I recently worked on a project about <a href="https://www.financialfairness.org.uk/en/our-work/publications/young-peoples-borrowing">young people and borrowing</a> with my colleague Hussan Aslam, which was funded by the charity <a href="https://www.financialfairness.org.uk/">abrdn Financial Fairness Trust</a>. We interviewed 80 young people (aged 18-24 years old) across the UK about money. Almost two-thirds see money and credit as taboo topics. </p>
<p>This attitude stops people from talking openly and learning about debt and finance. One person we spoke to said:</p>
<blockquote>
<p>I’ve always felt in society it’s a taboo subject that people don’t really talk about that often, and when you do bring it up everyone’s a little bit sheepish to talk about it, so … where do you get the information from? It’s not something you’re just born knowing … and if you do research online there’s an overwhelming amount of different information.</p>
</blockquote>
<p>This confusion around credit and borrowing is a problem, particularly for young people who are at the start of their financial lives. But your experience of credit as a young person – both good and bad – can influence how you manage your money for the rest of your life. </p>
<p>Research shows young people are often especially <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1467-9515.2010.00731.x">financially vulnerable</a> in this respect due to limited financial know-how or experience. So getting support to get the best out of credit can help people avoid common pitfalls. </p>
<p>People don’t always know where to go for <a href="https://www.moneyhelper.org.uk/en/family-and-care/student-and-graduate-money/supporting-yourself-financially-a-guide-for-young-adults-aged-16-to-24">support online</a>, which makes it difficult to gain the knowledge to make good financial decisions. Also, the financial products that are often marketed to young people – buy now, pay later deals, for example – may <a href="https://journals.sagepub.com/doi/10.1177/03128962211032448">help them feel more in control</a> of their money, but can actually promote irresponsible financial habits.</p>
<p>Such short-term financial decision making doesn’t always result in the most rational outcomes for longer-term financial wellbeing. The subscription-style of BNPL offerings can obscure the fact that it’s a form of debt and make the product appealing to young people, especially when used online at the point of sale. </p>
<p>There was little understanding among <a href="https://www.financialfairness.org.uk/en/our-work/publications/young-peoples-borrowing">the people we spoke to</a> about how credit use, including mobile phone contracts and BNPL, could affect their credit history if they were unable to repay the loan.</p>
<h2>How to help young people</h2>
<p>Many of the organisations people interact with – from financial services firms to employers – could do more to support people that want to use credit responsibly. For example, products and services from banks and fintechs could help people keep better control of their finances. </p>
<p>For younger people, this could include no or low-interest overdrafts when graduating from an interest-free student overdraft, for example. Recent “consumer duty” regulations by the <a href="https://www.fca.org.uk/publication/policy/ps22-9.pdf">Financial Conduct Authority</a> should help to ensure firms better inform and support consumers using credit and other financial products.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-new-consumer-duty-rules-for-financial-products-could-reduce-debt-related-stress-210169">How new 'consumer duty' rules for financial products could reduce debt-related stress</a>
</strong>
</em>
</p>
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<p>Financial services and financial technology firms can also play a role in boosting responsible use of credit by using the data they hold for good to help young people manage their money effectively. </p>
<p>For example, <a href="https://www.financialfairness.org.uk/en/our-work/publications/young-peoples-borrowing">young people want</a> more products and services that help them control their credit and money. Traditional banks and lenders could learn from fintechs by developing apps to help people actually visualise their finances. </p>
<p><a href="https://www.fincap.org.uk/en/reviews/helping-those-who-use-credit-to-make-ends-meet">Research shows</a> the pandemic and cost of living crisis have significantly influenced credit use. So, policy and practice by governments, regulators such as the Financial Conduct Authority, lenders, educators and advice providers such as the Money and Pensions Service (MaPS) must acknowledge the role that credit plays in helping people to make ends meet. </p>
<p>They could help find better ways to support financial decision-making as people transition to financial independence. </p>
<figure class="align-center ">
<img alt="A row of people on phones, emoticons." src="https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=340&fit=crop&dpr=1 600w, https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=340&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=340&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=427&fit=crop&dpr=1 754w, https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=427&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/559050/original/file-20231113-27-yjn9zw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=427&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Younger generations often seek financial advice online.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/people-watching-video-live-streamings-1338120284">Rawpixel.com/Shutterstock</a></span>
</figcaption>
</figure>
<p>Promoting trusted sources of advice would help here, rather than leaving people to rely on self-styled social media “<a href="https://www.asa.org.uk/news/asa-partners-with-fca-and-sharon-gaffka-to-educate-influencers-around-finfluencing.">finfluencers</a>”. Almost half of the young people we spoke to were influenced by social media to use credit or manage their money in a particular way. </p>
<p>The FCA and MaPs could develop more resources on relevant social media sites such as TikTok and Instagram, or other media platforms used by young people. They could create explainer videos on key topics that would help support young people who are considering using credit for the first time. </p>
<p>They could also use it to <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4216952">track and correct</a> new trends or incorrect assumptions about money among this age group.</p>
<p>Regulating <a href="https://theconversation.com/buy-now-pay-later-how-to-protect-consumers-without-regulating-it-out-of-existence-184761">buy now, pay later</a> schemes would also be a step in the right direction. The financial services sector needs to take greater responsibility to ensure good outcomes for everyone because financial decisions made today could last a lifetime.</p><img src="https://counter.theconversation.com/content/217144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Appleyard receives funding from abrdn Financial Fairness Trust. She is a Director of CreditU, a marketing platform which promotes UK Credit Unions.</span></em></p>Taboos around talking about money can prevent people from learning important lessons about using credit and getting into debt.Lindsey Appleyard, Assistant Professor, Coventry UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2145592023-11-06T13:34:05Z2023-11-06T13:34:05ZClimate change hits indebted businesses hardest, new research suggests<figure><img src="https://images.theconversation.com/files/556689/original/file-20231030-25-gfhibp.jpg?ixlib=rb-1.1.0&rect=297%2C1154%2C6833%2C3452&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Climate change leads to investment droughts, too. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/businessman-with-umbrella-standing-on-cracked-earth-royalty-free-image/685394718">mgstudyo/E+/Getty Images</a></span></figcaption></figure><p>Climate change poses the biggest risks to the <a href="https://doi.org/10.1002/wcc.565">most vulnerable people</a>, and the same is true for businesses: Highly leveraged companies – those that have accumulated too much debt – are uniquely susceptible to climate shocks. That’s what we found in a forthcoming study in The Review of Corporate Finance that analyzed data from <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541036">more than 2,500 U.S. publicly listed companies</a> over 16 years. </p>
<p>As professors who study <a href="https://www.bryant.edu/academics/faculty/kuang-huan">climate finance</a> and <a href="https://www.bryant.edu/academics/faculty/zheng-cathy">corporate governance</a>, we wanted to understand how climate change affects businesses, and how <a href="https://www.investopedia.com/terms/s/stakeholder.asp">stakeholders</a> – people who have a stake in a firm’s success, such as consumers, employees and investors – respond to it. </p>
<p>So we and our colleagues <a href="https://apps.ualberta.ca/directory/person/elghoul">Sadok El Ghoul</a> at the University of Alberta and <a href="https://sc.edu/study/colleges_schools/moore/directory/guedhami_omrane.php">Omrane Guedhami</a> at the University of South Carolina conducted a study to examine how climate risk affects indebted companies.</p>
<p>We found that climate change delivers a one-two punch to highly leveraged firms by intensifying the costs that stakeholders impose on them.</p>
<p>Consider consumers. Researchers know that climate change can push people to mix up their purchasing patterns – by buying greener products, for example, or by engaging in boycotts. And while evolving consumer preferences pose a challenge to all businesses, it’s harder for a company that’s deep in debt to adapt.</p>
<p>Our study suggested as much. Two years after facing intense climate change exposure, highly indebted firms saw sales growth fall by about 1.4% on average, we found. In monetary terms, that translates into an average US$59.7 million loss per company. </p>
<p>Climate change also worries investors, we found. Companies exposed to climate risk face the threat of financial and operational disruptions that may drain lenders’ funds, particularly for firms already burdened with high debt. By examining capital issuance within our sample of companies, we found that climate exposure reduced firms’ net debt issuance – meaning new debt minus retired debt – by around $457 million per firm on average. This is an additional hurdle for indebted businesses trying to raise money.</p>
<h2>Why it matters</h2>
<p>Researchers have long known that indebted companies are at greater risk of product failures and <a href="https://doi.org/10.1111/j.1540-6261.1994.tb00086.x">losing market share</a> <a href="https://doi.org/10.1016/S0304-405X(03)00070-9">when economic conditions go south</a>. Having too much debt can even force companies out of business, as some analysts contend <a href="https://www.washingtonpost.com/business/economy/analysts-toys-r-us-might-have-survived-if-it-did-not-have-to-deal-with-so-much-debt/2018/03/15/42752326-286a-11e8-874b-d517e912f125_story.html">happened with Toys R Us</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A STORE IS CLOSED sign is affixed to an automatic door at the entrance of a Toys R Us location." src="https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556917/original/file-20231031-25-psqa9x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A shuttered Toys R Us store in Orlando, Fla.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/toys-r-us-store-that-was-shuttered-in-2018-is-seen-on-june-news-photo/1151373510?adppopup=true">Paul Hennessy/NurPhoto via Getty Images</a></span>
</figcaption>
</figure>
<p>Our research suggests that climate change, which the World Economic Forum predicts will endanger <a href="http://www3.weforum.org/docs/WEF_Global_Risk_%20Report_2020.pdf">about 2% of global financial assets by 2100</a>, will push already shaky companies to the brink. It underscores the immense and asymmetric effects global warming will have on businesses – and the reality that the most vulnerable firms are set to endure the worst.</p>
<h2>What’s next</h2>
<p>Our study highlights the disproportionate impacts of climate change on financially fragile businesses. Moving forward, we plan to explore the influence of climate change on firms’ business behaviors, particularly in terms of their ethical conduct. </p>
<p>Regarding climate solutions, one of us (Huan Kuang) has shown how companies can use innovation to reduce their climate vulnerabilities. In <a href="http://dx.doi.org/10.2139/ssrn.4150960">a working paper</a> co-authored with <a href="https://www.isenberg.umass.edu/people/bing-liang">Bing Liang</a> of the University of Massachusetts Amherst, every 1% increase in climate-related innovation – as measured by patent data – was found to reduce firm-level carbon emissions growth by around 100,000 metric tons.</p>
<p>However, indebted firms may not rush to invest in new technologies without some prodding. That means policy incentives will be key to success, and further research is needed to determine what they should look like.</p>
<p>Climate change could also have more complicated economic effects than many people realize. For example, if it forces companies that aren’t viable out of business, that would be a good thing for the economy – at least in theory, as one of us (Ying Zheng) explored <a href="https://doi.org/10.1057/s41267-020-00309-x">in a recent paper</a> on a related subject.</p>
<p>Many questions remain unanswered, but it’s already clear that climate change will have important and multifaceted effects on the future of business. We encourage other researchers to investigate further.</p>
<p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take on interesting academic work.</em></p><img src="https://counter.theconversation.com/content/214559/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Global warming plus leverage equals a big mess for companies.Huan Kuang, Assistant Professor of Finance, Bryant UniversityYing (Cathy) Zheng, Associate Professor of Finance, Bryant UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2166652023-11-02T17:15:40Z2023-11-02T17:15:40ZMany divorcees end up with nothing or only debt after divorce – new study<figure><img src="https://images.theconversation.com/files/556800/original/file-20231031-29-irgz81.jpg?ixlib=rb-1.1.0&rect=40%2C50%2C6669%2C4416&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Divorced couples may have less assets to split than you think.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/unhappy-middle-aged-european-lady-takes-2212378645">Prostock-studio/Shutterstock</a></span></figcaption></figure><p>Contrary to the impression given by divorces covered in the <a href="https://www.theguardian.com/lifeandstyle/shortcuts/2015/feb/24/divorce-rich-husband-london-english-law">media</a>, most do not entail couples sharing vast amounts of wealth and spending huge sums on legal proceedings.</p>
<p>The Fair Shares Project is the <a href="https://www.bristol.ac.uk/law/fair-shares-project/">first nationally representative study</a> to examine the financial arrangements of divorcing couples in England and Wales. Our team’s <a href="https://www.bristol.ac.uk/media-library/sites/law/news/2023/Fair%20Shares%20report%20-%20final.pdf">new report</a> shows that most couples have very modest levels of assets to divide. In fact, 17% of divorcees in our survey had no assets at all, while 23% ended up with nothing or only debts following their divorce.</p>
<p>Divorce is a financial shock that ex-spouses – and their children – have to cope with as they adjust to living in two households. That shock can be particularly hard and long-lasting for older women, and women who have children.</p>
<p>The study, which one of us (Emma) led and was funded by the Nuffield Foundation, surveyed 2,415 people who had divorced up to five years previously, and interviewed 53 recent divorcees.</p>
<h2>Not much to share</h2>
<p>Couples may have less wealth to divide than you think: 28% of divorcees in our study had been living in rented accommodation and so, other than their pension, had very little by way of any capital to divide. It is not surprising, then, that 21% ended up with an amount less than £25,000.</p>
<p>The median net value of the assets, including property and pensions, that divorcing couples owned when they divorced was £135,000 - including those who had nothing or only debts. More than a quarter (28%) had assets below £100,000, while only 9% had over £1 million at their disposal. </p>
<figure class="align-center ">
<img alt="Close up of man and woman's hands resting on paperwork, car keys and house keys" src="https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557297/original/file-20231102-27-krn4wv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Our study found a 50/50 split does not reflect the priorities of most divorcees.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/divorce-agreement-wife-husband-can-not-263038649">Bacho/Shutterstock</a></span>
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<p>Our study found that wives generally had lower incomes than their husbands during the marriage, usually due to childcare responsibilities that prevented them working fulltime. This meant that divorcing wives had typically built up smaller pension pots than their husbands, pointing to greater financial hardship in later life. <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/familiesandthelabourmarketengland/2021">UK government data</a> also shows mothers spend more time on unpaid housework and childcare than fathers. </p>
<p>The law allows for a spouse to allocate rights in their pension to their ex-partner upon divorce. This may be used to help make up for one spouse having lost out on contributing to a pension due to caring responsibilities. However, our study found that only 11% of divorcees yet to retire had made such a pension-share arrangement – and of these, only a fifth (22%) shared the pension equally.</p>
<h2>Lack of awareness of their finances</h2>
<p>This failure to take account of pensions seemed to reflect a general lack of awareness or understanding of them, and even of their finances generally. </p>
<p>Nearly four in ten (38%) divorcees felt they’d had poor knowledge of their ex’s finances during the marriage. A third did not know the value of their own pension pot. And 10% did not know the equity value (how much of the mortgage had been paid off) of the former matrimonial home. This meant they were potentially in a weak position when it came to negotiating with their ex about how to share out their assets.</p>
<p>Yet 12% of those surveyed said they had sought out no information or advice when they divorced, and only a third had used a lawyer to help make their financial arrangements. Many divorcees were deterred by fear of legal costs.</p>
<p>However, contrary to <a href="https://theconversation.com/four-myths-about-the-financial-side-of-divorce-202975">popular misconception</a>, where legal or mediation costs were incurred, the costs were relatively modest: 24% of divorcees had to find less than £1,000, and a further 18% had costs between £1,000 and £3,000. Only 9% incurred costs of £10,000 or more.</p>
<p>Yet even modest costs may put legal help out of reach for some people. </p>
<h2>Losing out in the longer term</h2>
<p>The longer-term impact of making a poor deal is demonstrated by our data comparing divorcees’ household incomes at the time of the survey, up to five years after their divorce. Female divorcees, particularly mothers and those older in age, tended to be worse off than men, even when they had found new partners. For example, only 29% of women with dependent children, and 22% of women over 50 without children, had a household income above £35,000, compared with 45% and 32% of men.</p>
<p>The law that applies to the financial consequences of divorce is 50 years old. In 2020, <a href="https://members.parliament.uk/member/4198/contact">Baroness Fiona Shackleton</a> introduced a <a href="https://bills.parliament.uk/bills/2564">private member’s bill</a> into the House of Lords, arguing that it would be much simpler for couples managing their arrangements without help if there was a clear legal presumption that marital assets should be split 50/50. </p>
<p>But our study found that a 50/50 split would not reflect the needs or priorities of most divorcees. Only 28% had split their assets roughly equally; the majority either focused on who needed the assets most, or divided them according to who was the legal owner. For such divorcees, “fairness” lay in meeting needs or getting back what they had put into the marriage, not splitting a very small cake into two even smaller halves. </p>
<p>We believe it’s not the substantive law that needs reforming, but the means by which divorcees can access advice and help. Ensuring divorcing couples have access to affordable, appropriate and authoritative information, advice and support is key to ensuring that the deal they get is fair to both, and also protects their children.</p>
<p>A fair deal is one that takes account of all their available assets – including any pensions – so that they can each best adjust financially to life after the end of their marriage.</p><img src="https://counter.theconversation.com/content/216665/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emma Hitchings receives funding from The Nuffield Foundation and previously from the Law Commission, the Bar Council and the Ministry of Justice.</span></em></p><p class="fine-print"><em><span>Gillian Douglas receives funding from The Nuffield Foundation as a co-investigator on the project, 'Fair Shares: Sorting out money and property on divorce'. Her previous research on financial and property aspects of family law has been funded by the ESRC and Joseph Rowntree Foundation.</span></em></p>The Fair Shares Project reveals the financial realities of everyday divorce in England and Wales.Emma Hitchings, Professor of Family Law, University of BristolGillian Douglas, Professor Emerita of Law, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2154212023-10-15T12:27:45Z2023-10-15T12:27:45ZThe hidden risks of buy now, pay later: What shoppers need to know<figure><img src="https://images.theconversation.com/files/553377/original/file-20231011-25-bvjczk.jpg?ixlib=rb-1.1.0&rect=50%2C70%2C6659%2C4396&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Buy now, pay later loans target low-income, tech-savvy Gen Z and millennial consumers under the guise of improving financial inclusion for these groups.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/the-hidden-risks-of-buy-now-pay-later-what-shoppers-need-to-know" width="100%" height="400"></iframe>
<p><a href="https://www.canada.ca/en/financial-consumer-agency/services/loans/buy-now-pay-later.html">Buy now, pay later</a> is a relatively new form of financial technology that allows consumers to purchase an item immediately and repay the balance at a later time in instalments.</p>
<p>Unlike applying for a credit card, buy now, pay later <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4591446">doesn’t require a credit check</a>. Instead, <a href="https://doi.org/10.1108/EJM-11-2021-0923">these programs use algorithms</a> to perform <a href="https://www.investopedia.com/terms/s/soft-inquiry.asp">“soft” credit checks</a> to determine <a href="https://theconversation.com/if-it-looks-like-debt-lets-treat-it-like-debt-buy-now-pay-later-schemes-need-firmer-regulation-in-nz-211820">a shopper’s eligibility</a>. </p>
<p>This means buy now, pay later loans target <a href="https://www.theguardian.com/money/2022/jan/27/buy-now-pay-later-schemes-entice-consumers-spend-more">low-income, tech-savvy</a> <a href="https://www.cnbc.com/2022/10/27/gen-z-and-millennials-prefer-buy-now-pay-later-services.html">millennials and Gen Z shoppers</a> in an effort to <a href="https://libertystreeteconomics.newyorkfed.org/2023/09/who-uses-buy-now-pay-later/">supposedly improve financial inclusion</a> for these groups.</p>
<p>However, the newness of buy now, pay later programs means existing <a href="https://doi.org/10.1111/acfi.13100">consumer credit laws don’t cover it</a>. This lack of regulation puts shoppers at financial risk of accumulating higher levels of debt.</p>
<h2>Credit cards versus buy now, pay later</h2>
<p>There are three key differences between credit cards and buy now, pay later loans. First, while buy now, pay later loans are a line of credit like credit cards are, <a href="https://www.cnbc.com/2022/05/04/klarna-to-report-buy-now-pay-later-data-to-uk-credit-bureaus.html">they don’t impact credit reports</a>. Because of this, shoppers might be less cautious when using buy now, pay later services. </p>
<p>Credit cards typically have annual interest rates ranging from <a href="https://www.bankrate.com/finance/credit-cards/what-is-credit-card-apr/#credit-card-apr-vs-credit-card-interest">15 to 26 per cent</a>. While most buy now, pay later loans have no interest, longer term loans have <a href="https://www.cbsnews.com/news/buy-now-pay-later-loans-interest-rate-fees-tips-what-to-know/">annual interest rates of about 37 per cent</a>. </p>
<p>Shoppers are <a href="https://hbswk.hbs.edu/item/buy-now-pay-later-how-retails-hot-feature-hurts-lower-income-shoppers">at risk of overusing buy now, pay later programs</a> and accumulating more debt than they can manage. In addition, formal lenders, such as banks, currently have no way of knowing what buy now, pay later debt a person is carrying. The lender, therefore, likely incurs more risk than they are aware of.</p>
<figure class="align-center ">
<img alt="A close-up of a pair of hands using a credit card reader in a store" src="https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Unlike applying for a credit card, buy now, pay later services don’t require consumers to get a credit check.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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</figure>
<p>Second, credit cards typically provide <a href="https://doi.org/10.1080/1369118X.2022.2161830">an interest-free period</a>, after which <a href="https://doi.org/10.1177/03128962211032448">borrowers must pay interest</a>. In contrast, buy now, pay later users typically don’t have interest fees, but can incur <a href="https://doi.org/10.1108/IJBM-07-2022-0324">late fees for missed or late payments</a>. </p>
<p>Falling behind on payment terms <a href="https://www.forbes.com/sites/andriacheng/2020/12/16/why-retailers-are-embracing-buy-now-pay-later-service-this-holiday-season/">can result in charges</a> that exceed <a href="https://stateline.org/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans/">typical credit card interest rates</a>, causing more harm than interest payments. Low-income buy now, pay later users are <a href="https://hbswk.hbs.edu/item/buy-now-pay-later-how-retails-hot-feature-hurts-lower-income-shoppers">particularly vulnerable</a> to <a href="https://www.consumerfinance.gov/data-research/research-reports/consumer-use-of-buy-now-pay-later-insights-from-the-cfpb-making-ends-meet-survey/">using overdrafts to cover their buy now, pay later payments</a>.</p>
<p>Third, people typically have just a few credit cards, making it easier to keep track of payments. Buy now, pay later users, on the other hand, usually engage with multiple buy now, pay later lenders through retailers. As a result, it’s difficult for them to keep track of all the buy now, pay later lenders and retailers they made purchases from.</p>
<h2>What are the Canadian governments doing?</h2>
<p>Canada classifies buy now, pay later as an unsecured instalment loan, which means lenders are subject to laws at the federal and provincial levels.</p>
<p>Under federal law, there is an <a href="https://www.sec.gov/Archives/edgar/data/1711291/000171129122000011/curo-20211231.htm">annual interest rate cap of 60 per cent</a>. Provincial laws require buy now, pay later lenders to disclose the cost of credit and extend consumer protection rights to buy now, pay later shoppers. </p>
<p>At the provincial level, <a href="https://www.canada.ca/en/financial-consumer-agency/services/loans/buy-now-pay-later.html">specific laws come into play</a>. Manitoba, Alberta, Québec, and Ontario have passed laws that require lenders to be licensed before they offer these products and be subject to regulatory oversight. </p>
<p>These laws regulate high-cost credit products that have annual rates of 32 per cent or higher. This means buy now, pay later services <em>should</em> fall under this category. However, I found no evidence of buy now, pay later lenders being licensed in Canada. This means either lenders are not aware they fall under these laws, or no one is enforcing them.</p>
<p>This ambiguity over whether or not buy now, pay later lenders are subject to regulatory oversight could be a hindrance for banks like the <a href="https://financialpost.com/fp-finance/fintech/why-higher-interest-rates-threaten-the-buy-now-pay-later-bubble">Bank of Nova Scotia and the Canadian Imperial Bank of Commerce</a>, as it deters them from entering the buy now, pay later market despite its profitability.</p>
<h2>Questions to ask before using buy now, pay later</h2>
<p>Before signing up for a buy now, pay later loan, shoppers should consider the following six questions.</p>
<p><strong>1. Payment structure.</strong> How much of the invoice amount needs to be paid upfront? The norm is typically 25 per cent. What is the number of remaining instalments? The answer to this is usually four. Lastly, what is the frequency of instalments? The norm is biweekly.</p>
<p><strong>2. Sensitive information.</strong> Does the lender require you to provide information about your chequing account? This is sensitive information to give away and puts you at risk of data breaches. Most buy now, pay later lenders withdraw instalment amounts from chequing accounts or debit cards, potentially exposing shoppers to greater risks than credit cards.</p>
<p><strong>3. Interest charges</strong> Does the buy now, pay later lender charge interest on instalment payments? The norm is no.</p>
<p><strong>4. Late fees</strong> How much is the late fee, when does it apply and what is the maximum amount of the late fee? Typically, late fees don’t exceed $8 or one-quarter of the invoice amount. Late fees usually kick in if your scheduled payment remains unpaid after 10 days.</p>
<p><strong>5. Data responsibility.</strong> Who is responsible for your data? Whether it’s the retailer, the buy now, pay later lender or a company whose cloud storage the provider may be using, you should know. In general, the buy now, pay later lender holds this responsibility.</p>
<p><strong>6. Licensing.</strong> Is the buy now, pay later lender licensed to sell the loan? Usually, the <a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2020/03/afterpay-settlement.pdf">answer to this question is no</a>.</p>
<h2>Buy now, pay later regulation</h2>
<p>Two sets of laws and regulations should be implemented to address some of these issues. The first set of regulations focuses on how buy now, pay later lenders interact with consumers. These lenders should clearly communicate <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4359956">all terms and conditions of their loans</a>, including late charges, interest charges and payment schedules, on their platforms to ensure shoppers are fully informed of their financial obligations.</p>
<p>The Financial Conduct Authority in the United Kingdom recently issued guidelines allowing buy now, pay later lenders to <a href="https://www.ft.com/content/ca428bc8-65c3-49ed-8ba6-0d6f206098aa">terminate, suspend or restrict access to shopper accounts</a> for any reason without notice. Effective September 2024, New Zealand will require buy now, pay later lenders to <a href="https://theconversation.com/if-it-looks-like-debt-lets-treat-it-like-debt-buy-now-pay-later-schemes-need-firmer-regulation-in-nz-211820">check a shopper’s credit</a> before providing them a buy now, pay later loan.</p>
<p>The second set of regulations defines the scope and boundaries of buy now, pay later lenders. On Dec. 9, 2022, California became the first American state to <a href="https://dfpi.ca.gov/2022/12/09/buy-now-pay-later-protect-yourself-before-you-check-out/">classify buy now, pay later as a loan</a>. Such classifications allowed California regulators to <a href="https://stateline.org/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans/">question lenders about their transparency in disclosing the terms of their offerings</a>.</p>
<p>The hope is that these laws and regulations will facilitate microlending and not impede the existence of buy now, pay later services, but rather make it safer and more secure for both lenders and users.</p><img src="https://counter.theconversation.com/content/215421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vivek Astvansh has been a member of a team that received funding from the U.S. Environmental Protection Agency.</span></em></p><p class="fine-print"><em><span>Chandan Kumar Behera does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Are buy now, pay later services truly a new way to boost financial inclusion, or just another type of predatory loan?Vivek Astvansh, Associate Professor of Quantitative Marketing and Analytics, McGill UniversityChandan Kumar Behera, PhD Student in Marketing, Indian Institute of Management LucknowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2134132023-09-19T14:47:48Z2023-09-19T14:47:48ZBankruptcy is spiking among UK borrowers – but there are debt relief options if you are struggling financially<figure><img src="https://images.theconversation.com/files/548392/original/file-20230914-27-46idox.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C4867%2C3561&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-attractive-woman-looking-stressed-worried-1258658701">SB Arts Media/Shutterstock</a></span></figcaption></figure><p>UK households have one of the <a href="https://invezz.com/stocks/debt-countries/">highest debt levels in the world</a>. Steadily increasing in the last two decades, the <a href="https://themoneycharity.org.uk/money-statistics/">average total debt per household</a> (including mortgages) is £65,619 as of August 2023. This is £34,644 per adult, or around 103.5% of average earnings.</p>
<p>As indebtedness has steadily increased over the last two decades, household bankruptcies have quadrupled, reaching around 200,000 filings in 2022. One of the main reasons of this increase is arguably the <a href="https://www.legislation.gov.uk/uksi/2002/1307/made">2002 UK bankruptcy reform</a>, which made it easier for people to file for bankruptcy. </p>
<p><strong>Consumer bankruptcies are rising in the UK</strong></p>
<p>While the use of some types of debt relief agreements have fallen in the year to August 2023, <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-august-2023/commentary-monthly-insolvency-statistics-august-2023#company-and-individual-insolvencies-in-england-and-wales">according to the latest government figures</a>, registrations for the government’s <a href="https://www.theguardian.com/money/2019/jun/19/uks-problem-debtors-to-get-60-day-breathing-space">“breathing space” scheme</a> – which gives debtors 60 days relief from pursuit by creditors – grew by 19% over this time.</p>
<p>The <a href="https://www.bbc.co.uk/news/topics/cljev4jz3pjt">cost of living crisis</a> is probably one of the main reasons for this spike in bankruptcy figures. Families across the country have been struggling to keep up with the rising price of essential goods and <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">increased borrowing rates</a> since mid-2021. At the end of last year, UK pay adjusted for inflation also <a href="https://www.theguardian.com/business/2023/jan/17/real-terms-uk-pay-fell-fastest-20-years#:%7E:text=7%20months%20old-,Real%2Dterms%20UK%20pay%20fell%20at%20fastest%20rates%20for,years%20at%20end%20of%202022&text=Average%20real%2Dterms%20pay%20in,the%20cost%20of%20living%20crisis.">fell at the fastest rate</a> in 20 years.</p>
<p>Other factors can also trigger bankruptcy, however. Our <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">recent study</a> highlights two main reasons. First, we found that people tend to go bankrupt strategically – if they can financially benefit from it. This often happens when a person’s debt is far greater than the assets they have to liquidate (or sell) as part of the bankruptcy. </p>
<p>Second, adverse life events such as divorce, serious health problems or sudden unemployment can cause financial distress. This often takes the form of loss of income and further borrowing. This affects people’s ability to repay their debt, eventually leading to bankruptcy.</p>
<h2>The options when struggling with debt</h2>
<p>Filing for bankruptcy is a formal process for cancelling your debts (also known as discharging, or <a href="https://aib.gov.uk/bankruptcy">sequestration</a> in Scotland) if you are having trouble making repayments. Consumer organisations such as <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/before-you-go-bankrupt/check-if-going-bankrupt-is-right-for-you/">Citizens Advice</a> in the UK can provide information to help you decide if bankruptcy is the right choice for you.</p>
<p>If you do decide to declare <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/">bankruptcy</a>, a court issues a bankruptcy order after an application by you or one of the people you owe money to (your creditors, for example a bank or a supplier if you are a business). Full discharge from debt usually happens 12 months after a bankruptcy order is granted.</p>
<p>But bankruptcy isn’t the only option if you’re struggling financially. A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-relief-orders/">debt relief order</a> (DRO) is a simpler, faster process for people with low income, fewer assets and debts of less than £30,000. When a DRO ends, typically after 12 months, most of your debts will be written off but some types aren’t covered. So, it’s important to <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/how-bankruptcy-affects-you/check-which-debts-bankruptcy-covers/">check what types are included</a> under this arrangement. </p>
<p>Alternatively, you could enter into an <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/individual-voluntary-arrangements-ivas/">individual voluntary arrangement</a> (IVA), which is a contract with your creditors. There is no maximum limit to the amount of debt that can be included in an IVA but at least 75% of your creditors have to agree to the plan. An <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/administration-orders/">administration order</a> (AO) is a simpler version of this for people with debts of less than £5,000. In Scotland, a <a href="https://aib.gov.uk/protected-trust-deed">protected trust deed</a> (PTD) provides the same kind of agreement.</p>
<p>Under IVAs, AOs and PTDs, you agree to repay your debt based on a new repayment plan negotiated by an independent professional called an insolvency practitioner. The plan is approved by the court and your creditors have to stick to it too. The renegotiated repayments are usually made in the form of a single monthly payment or a one-off lump sum. </p>
<p>And during your repayment plan you cannot take out new credit without a written permission from your insolvency practitioner. Bankruptcy proceedings are shown in your <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/after-you-go-bankrupt/discharge-from-bankruptcy/">credit report for 6 years</a> and new lenders will be able to see that.</p>
<p>A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-management-plans/">debt management plan</a> is a fourth option for people struggling financially. It is an agreement with creditors to stick to a new repayment plan, negotiated by a licensed debt management company. Unlike the other options, debt management plans are not legally binding, so any or all of your creditors don’t have to agree on a plan and they can chase you for repayments individually. This is known as <a href="https://aib.gov.uk/debt-arrangement-scheme">debt arrangement scheme (DAS)</a> in Scotland.</p>
<figure class="align-center ">
<img alt="Two women with a pad, paper, laptop and mugs at kitchen table." src="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A little breathing space can give you time to work out a plan for your finances.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/woman-helping-her-same-sex-partner-2048169593">bbernard/Shutterstock</a></span>
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</figure>
<h2>Getting some breathing space</h2>
<p>The UK government launched its <a href="https://www.gov.uk/options-for-dealing-with-your-debts/breathing-space">breathing space</a> scheme in May 2021. And it has clearly been useful for struggling individuals in the midst of the cost of living crisis – registrations <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-july-2023">increased by 28%</a> in the year to July 2023.</p>
<p>It allows you to seek legal protection from pursuit by your creditors for 60 days. During this period, most interest and penalty charges are frozen, enforcement action is halted and your creditors cannot contact you about your debts. But you still need to make your repayments.</p>
<p>A version of the scheme is also offered to individuals who are getting <a href="https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors#:%7E:text=on%20their%20debts.-,Mental%20health%20crisis%20breathing%20space,-A%20mental%20health">mental health crisis treatment</a>. The protection from creditors is for the length of treatment plus 30 days. </p>
<p>Breathing space is a temporary protection and could be a helpful first step to give you some time to plan your finances, but what about after that? <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">Our research shows</a> bankrupt individuals face difficulties borrowing again after bankruptcy. </p>
<p>If you completely discharge your debt, the impact on your borrowing ability is dramatic and swift but short lived – a year on average. But for debt restructuring, future borrowing limitations can last as long as three years.</p>
<p>That’s why it’s important to carefully consider your options if you can’t manage your debt commitments to make sure you find the best fit for your financial situation.</p><img src="https://counter.theconversation.com/content/213413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The cost of living crisis is affecting UK households, but there are options to consider if you’re having problems repaying debt such as mortgages and credit cards.Alper Kara, Professor of Banking and Finance, Brunel University LondonAtilla Gumus, Senior Lecturer in Financial Economics, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2125692023-09-06T21:48:14Z2023-09-06T21:48:14ZThe price of love: Why millennials and Gen Zs are running up major dating debt<figure><img src="https://images.theconversation.com/files/546762/original/file-20230906-40532-qq86zj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Are you looking for love in all the wrong places?</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/the-price-of-love-why-millennials-and-gen-zs-are-running-up-major-dating-debt" width="100%" height="400"></iframe>
<p><a href="https://nypost.com/2019/09/12/heres-how-much-money-the-average-american-spends-on-dating/">The average American invests US$120,000 throughout their lifetime in pursuit of love</a>, spending significant money on romantic dinners, movie outings and thoughtful gifts, not to mention personal grooming and cosmetic products. </p>
<p>As a result, according to <a href="https://www.lendingtree.com/credit-cards/study/dating-money-inflation/">a survey by LendingTree</a>, 22 per cent of millennials and 19 per cent of Gen Z have begun to incur “dating debt.”</p>
<p>Another study by <a href="https://www.creditkarma.com/insights/i/dating-debt-young-adults-survey">Credit Karma</a> found that 29 per cent of people aged 18–34 have accrued debt for a date, with 21 per cent exceeding $500 in dating debt in a year. Reasons include accidental overspending (29 per cent), an attempt to impress dates (28 per cent) and seeking intimacy (19 per cent).</p>
<p>But another survey <a href="https://www.finder.com/unacceptable-partner-debt">by Finder</a> also reveals that 44 per cent of Gen Zs consider debt a romantic deal-breaker when considering a partner. </p>
<p>This highlights potential ties between accumulating <a href="https://doi.org/10.1111/j.1741-3729.2012.00715.x">dating-related debt and barriers to the chances of success</a> in forming meaningful romantic connections.</p>
<figure class="align-center ">
<img alt="A man sits on a picnic blanket and opens a bottle of champagne." src="https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Luxury dates are leading to debt for millennials and Gen Zs.</span>
<span class="attribution"><span class="source">(Jelleke Vanooteghem/Unsplash)</span></span>
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<p>This conundrum is a problem for younger generations, where the pursuit of love and connection is intricately tied to an appetite for luxury, ultimately leading to debt accumulation. </p>
<p>The trend has implications for financial stability, emotional well-being and the very essence of modern relationships.</p>
<p>There are a few issues fuelling it, including the desire to signal status and the persuasive retail marketing of luxury as being synonymous with love, creating that false sense of connection between luxury and love.</p>
<h2>‘Costly signalling’</h2>
<p>Accumulating debt for romantic engagements has its roots in an innate human desire — namely, the urge to signal status. In a digital age where social media and online dating platforms are the norm, <a href="https://doi.org/10.1007/s11621-012-0108-7">standing out in a crowd has never been more challenging</a>, yet it’s also crucial.</p>
<p><a href="https://doi.org/10.1007/978-3-319-16999-6_3483-1">The “costly signalling” theory</a> may explain why such habits develop. It argues that humans and animals use resource-intensive or risky behaviours as genuine, hard-to-fake signals indicating their desirable traits and availability. </p>
<p>This is related to <a href="https://doi.org/10.4324/9780203936993">conspicuous consumption</a>, which is driven by a desire for status and the clear signalling of this status to onlookers. </p>
<p><a href="https://www.psychologytoday.com/ca/blog/after-service/202102/what-your-social-signals-reveal">Signalling status in relationships or social circles isn’t uncommon</a>, but it’s found a financial expression in younger generations. Young adults are increasingly associating luxury experiences and goods with a <a href="https://doi.org/10.1057/palgrave.bm.2540194">unique form of personal expression</a>. </p>
<p>Whether it’s a lavish dinner at a high-end restaurant or gifting a designer handbag, these actions become <a href="https://doi.org/10.1080/21639159.2022.2033132">markers of distinction and status</a>. While these acts add a layer of individuality to a relationship, they come with the risk of potential financial instability.</p>
<h2>Retail marketing</h2>
<p>Retailers often <a href="https://doi.org/10.1093/jcr/ucac034">employ strategic marketing tactics to link luxury with love</a>, capitalizing on the emotional connection between these two powerful concepts to entice consumers into purchasing high-end goods. </p>
<p>For instance, luxury brands often release limited-edition Valentine’s Day collections, adorned with romantic motifs and themes, ranging from heart-shaped jewellery to high-end designer fragrances. </p>
<p>Additionally, retailers leverage the allure of love in their advertisements. They often showcase couples exchanging luxury gifts in opulent settings, fostering an aspirational connection between luxury products and romantic ideals. </p>
<figure class="align-right ">
<img alt="A diamond engagement ring on a Tiffany blue background." src="https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=353&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=353&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=353&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=444&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=444&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=444&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Tiffany ‘Believe in Love’ campaign featured links to engagement ring offerings.</span>
<span class="attribution"><span class="source">(Unsplash)</span></span>
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<p>For example, <a href="https://www.tiffany.ca/engagement/love-stories/">Tiffany & Co. released a “Believe in Love”</a> campaign featuring stories of seven couples at different stages of their relationships, and how Tiffany has played a part in their love journey.</p>
<p>Retailers create an <a href="https://doi.org/10.1093/jcr/ucac034">ambience of indulgence and luxury</a>, presenting their offerings as tokens of affection and devotion. </p>
<p>Personalized engraving services on luxury items, such as monogrammed initials or special dates, further enhance the sentimentality and connection between the product and the act of gifting, convincing consumers to spend money on these high-end, emotionally charged offerings. </p>
<p>For example, Gucci’s “<a href="https://www.lofficielbaltic.com/en/fashion/apple-of-my-eye-gucci-s-apple-print-collection-comes-in-time-for-chinese-valentine-s-day">apple of my eye</a>” limited-edition collection shows two interlocking red letter Gs that are meant to signify romantic love.</p>
<p>These strategic marketing tactics linking luxury with love contribute to more debt by enticing consumers to overspend on high-end goods with premium price tags. They promote impulse buying through limited-edition collections, foster unrealistic desires through aspirational advertising, encourage additional spending on personalized services and compel people to prioritize romantic gestures over financial responsibility.</p>
<p>This ultimately leads to the accumulation of debt as consumers strive to express their love through emotionally charged purchases.</p>
<h2>False sense of connection</h2>
<p>But there seems to be an intriguing paradox when it comes to luxury goods and their ties to social relationships. </p>
<p>While luxury items can enhance someone’s social image and boost self-perception, <a href="https://doi.org/10.1108/JCM-09-2014-1161">people also tend to view themselves more positively when they possess or experience luxury — even though they often hold a less favourable view of others who do the same</a>. </p>
<p>This sheds light on a fascinating discrepancy in self-versus-other evaluations when it comes to luxury consumption. </p>
<p>In a dating context, a person boasting about the purchase of an expensive wine on a dinner date, for example, may over-estimate whether it will actually impress their date.</p>
<figure class="align-center ">
<img alt="A glass of white wine sits in front of a woman at a table in a restaurant." src="https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Ordering an expensive bottle of wine on a date isn’t necessarily impressive.</span>
<span class="attribution"><span class="source">(JP Valery/Unsplash)</span></span>
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<p>Gift-givers often believe that more expensive gifts are more appreciated, assuming they convey greater thoughtfulness. But gift recipients don’t necessarily share this belief because they don’t consistently link gift price to their level of appreciation.</p>
<p><a href="https://doi.org/10.1016/j.jesp.2008.11.003">This suggests that gift-givers may not accurately predict what gifts will be meaningful to others</a>. And because they personally may connect expensive gifts with something meaningful, it may lead them to spend more, ultimately contributing to greater dating debt.</p>
<p>Interestingly, while it’s known that people use luxury items to signal their social status and earning capacity, the reactions to such gifts may be complex. Indeed, <a href="https://doi.org/10.1016/j.jesp.2019.103945">many people prioritize their independence and question the giver’s motives behind such gifts, fearing power imbalances and expectations</a>. </p>
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Read more:
<a href="https://theconversation.com/an-essential-piece-in-every-wardrobe-young-people-are-shopping-for-luxury-like-never-before-184536">'An essential piece in every wardrobe': Young people are shopping for luxury like never before</a>
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<p>Instead, they may value personal connections over materialistic displays and be cautious in the early stages of a relationship. </p>
<p>Ultimately, open and honest communication about expectations is crucial for navigating these complexities, ensuring that gift-giving aligns with the relationship’s goals and mutual desires.</p>
<p>The concept of luxury often gets mixed up with our quest for love, creating a captivating but misleading link between the two. In the realm of romantic relationships, luxury goods or indulging in extravagant experiences can sometimes make us feel closer to our partners than we really are.</p>
<p>But the ties between luxury and love can be deceiving. While luxury can certainly add to the romance, it’s important for younger generations to see the difference between flashy things and the deep, lasting connections that bring us closer to love.</p><img src="https://counter.theconversation.com/content/212569/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Genuine love holds immeasurable value, yet discovering it can pose challenges — and come with a significant price tag.Omar H. Fares, Lecturer in the Ted Rogers School of Retail Management, Toronto Metropolitan UniversitySeung Hwan (Mark) Lee, Professor and Associate Dean of Engagement & Inclusion, Ted Rogers School of Management, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2120982023-08-27T22:42:36Z2023-08-27T22:42:36ZFinancial education has its limits – if we want New Zealanders to be better with money, we need to start at home<p>Even as an economics student at university, I remember heading into town on a Friday night knowing what I needed to pay the bills before I could spend on socialising. But despite having the financial literacy to know better, Monday could still sometimes begin with a trip to the bank to ask for an overdraft extension. </p>
<p>So it was encouraging to hear that financial education has become a political talking point ahead of this year’s election. Both <a href="https://www.stuff.co.nz/national/politics/132778326/labour-promises-compulsory-financial-literacy-lessons-for-school-children-national-backs-the-idea">Labour</a> and <a href="https://www.1news.co.nz/2023/08/20/national-also-aiming-to-make-financial-literacy-compulsory-in-schools/">National</a> are promising to deliver compulsory financial literacy classes as part of the school curriculum. </p>
<p>Labour’s proposed financial literacy programme would include the basics of budgeting, financial concepts and how to be good with money. It would also include explanations of interest rates, retirement savings, insurance, debt and borrowing. </p>
<p>And when Prime Minister Chris Hipkins said “it shouldn’t matter what circumstances you were born into, you should still be able to learn concepts to help you”, he was right. Improved financial literacy can only be a good thing for New Zealand. </p>
<p>With the country in a recession, New Zealanders are facing both <a href="https://theconversation.com/dont-let-financial-shame-be-your-ruin-open-conversations-can-help-ease-the-burden-of-personal-debt-202496">ballooning debt and a legacy of poor saving</a>. The average household debt in New Zealand is now more than 170% of gross household income. This is higher than the United Kingdom (133%), Australia (113%) or Ireland (96%). </p>
<p>And yet, researchers remain divided over whether financial education can actually have a positive impact on financial behaviour in the long term. In New Zealand and elsewhere, it seems factors closer to home have a greater influence on a person’s financial literacy than anything learned at school. </p>
<h2>Education, borrowing and debt</h2>
<p>One 2014 <a href="https://openknowledge.worldbank.org/entities/publication/44870ac3-5b7e-57f7-be49-000f56f4cc30">meta-analysis</a> of 188 research papers and articles concluded financial literacy interventions had a positive impact on increasing savings, but had no impact on reducing loan defaults. </p>
<p>A <a href="https://openknowledge.worldbank.org/entities/publication/eb8b7699-0d2f-5d6d-ab1e-4262122c1a9c">second analysis of 126 studies</a>, published in 2017, found financial education positively affected financial behaviour – but this had limits for lower-income families. Much like the earlier study, the researchers found borrowing behaviour was more difficult to change with formal education than saving behaviour. </p>
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Read more:
<a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">Are you financially literate? Here are 7 signs you're on the right track</a>
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<p>An important caveat is that these analyses measured the short-term response to hypothetical questions, not long-term behaviour.</p>
<p>But even when examining the impact of financial education on short-term behaviour, researchers found it was difficult to influence how people handled debt. Compulsory financial education did not improve the likelihood of getting into debt, or the likelihood of defaulting on loans. </p>
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<h2>Home and financial knowledge</h2>
<p>In his famous work on <a href="https://hr.berkeley.edu/how-social-learning-theory-works">social learning theory</a>, psychologist Albert Bandurra proposed that observation and modelling play a primary role in how and why people learn. They are particularly relevant to the development of financial attitudes, confidence and behaviour. </p>
<p>Specifically, young people learn from the financial behaviour <a href="http://abrn.asia/ojs/index.php/apjssr/article/view/61/68">modelled by their parents</a>, discussions about money in the home, and from receiving pocket money.</p>
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Read more:
<a href="https://theconversation.com/financial-literacy-is-a-public-policy-problem-84695">Financial literacy is a public policy problem</a>
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<p>It has been suggested the differences in how money and finances are dealt with in the home are linked to why women generally <a href="https://theconversation.com/hilda-survey-reveals-striking-gender-and-age-divide-in-financial-literacy-test-yourself-with-this-quiz-100451">score lower on financial literacy quizzes</a>, as do people from lower socio-economic backgrounds. </p>
<p>Parents’ education and their financial sophistication – whether they have stocks, for example – <a href="https://www.mdpi.com/1911-8074/16/4/252">have been shown</a> to affect their offspring’s financial literacy. Women are also found to have <a href="https://institute.eib.org/wp-content/uploads/2016/10/women-conf-lit.pdf">lower financial confidence</a>, even when they have the right knowledge.</p>
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<p>In a <a href="https://www.emerald.com/insight/content/doi/10.1108/YC-07-2017-00717/full/html">New Zealand study</a> of over 1,200 young people aged 14 and 15, the age of the first financial discussion between parent and child was found to be an important influence on future financial knowledge, attitudes and intentions. </p>
<p>The study found boys, on average, had their first financial discussion in the home at a younger age than girls. The age at which these initial discussions happen influence a person’s financial literacy levels at tertiary education age and beyond, even accounting for other demographic variables. </p>
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Read more:
<a href="https://theconversation.com/there-are-serious-problems-with-the-concept-of-financial-literacy-84836">There are serious problems with the concept of 'financial literacy'</a>
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<p>These findings suggest the way parents talk and manage finances in the home may be subject to a gender bias, contributing to <a href="https://onlinelibrary.wiley.com/doi/10.1111/ijcs.12179">different levels of financial literacy</a> – and confidence – between girls and boys. </p>
<p>So, as we consider adding financial education to New Zealand’s curriculum, it’s important to consider all of the factors that will feed into a student’s money literacy – and not just focus on test results in a classroom setting.</p><img src="https://counter.theconversation.com/content/212098/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Agnew does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both major political parties have promised to introduce financial literacy to New Zealand’s curriculum. But is school really the best place to teach students about money?Stephen Agnew, Senior Lecturer of Economics, University of CanterburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2108952023-08-24T20:20:41Z2023-08-24T20:20:41ZShop around, take lunch, catch the bus. It is possible to ease the squeeze on your budget<p><em>This article is part of The Conversation’s series examining Australia’s cost of living crisis. You can read the other articles in the series <a href="https://theconversation.com/au/topics/cost-of-living-series-144357">here</a>.</em></p>
<hr>
<p>It’s no secret that the cost of living has increased substantially over the last year, with rises of between <a href="https://www.abs.gov.au/media-centre/media-releases/employees-annual-living-costs-highest-record#:%7E:text=%E2%80%9CLiving%20costs%20for%20employee%20households,per%20cent%20was%20in%201986.">7.1 and 9.6 per cent</a> for all households. So what can households do to manage these increases?</p>
<p>It might sound simple, but starting with a budget is the best approach. Even if you already have a budget, price increases mean it will need to be updated. For those new to budgeting, it is just a list of your income and expenses.</p>
<p>Make sure you match the frequency of these so you are working out your budget over a week, or a fortnight, or a month. There are plenty of budgeting apps and websites that can help, such as the <a href="https://moneysmart.gov.au/budgeting/budget-planner">Moneysmart budget planner</a>.</p>
<p>Once your budget is up to date, you can see your financial position. Do you have a surplus of cash – congratulations! You can save that money to help you in an emergency.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A pen and calculator and a handwritten household budget" src="https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/544177/original/file-20230823-29-pd8rjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Having a budget helps you track what you are spending and what you owe.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hand-writing-home-budget-calculator-311686631">Shutterstock</a></span>
</figcaption>
</figure>
<p>But what about if you have less income than expenses? You need to work through a process of figuring out where you can cut back.</p>
<p>Some expenses are easy to cut back on:</p>
<ul>
<li><p>If you have multiple streaming services, drop back to one at a time. Check for any other subscriptions you might be paying for – if you are not using them frequently, now is the time to cancel. You can always resubscribe when money isn’t tight.</p></li>
<li><p>If you are spending a lot of money on take out or paying for lunch, find cheaper alternatives such as eating at home and packing a lunch using cheaper ingredients. Switch to tap water for normal drinks, and take a travel cup of coffee with you.</p></li>
<li><p>Check and see if public transport is cheaper for you. If you are using a lot of fuel and paying for parking, public transport could be a better option.</p></li>
<li><p>Groceries can be a huge cost for families. It is always worth shopping around to not pay full price. Understand unit pricing and buy the products you use when they are on special. It might be necessary to switch to cheaper products.</p></li>
<li><p>Check if you are paying too much for your utilities like internet, electricity and gas. There are comparison websites you can use, including the <a href="https://www.energymadeeasy.gov.au/">Energy Made Easy</a> website. You can also make simple changes such as turning off lights and using a saucepan lid when boiling water that will reduce your usage.</p></li>
<li><p>Check other products you might be paying for, such as car, home and health insurance to see if you can save money by switching. Be careful with any life or disability policies. It is best to speak to a financial adviser before changing those as there can be implications for cover.</p></li>
</ul>
<p>Other expenses, like housing, can be a lot harder to manage.</p>
<p>Rising interest rates have pushed up mortgage repayments for homeowners. Mortgage interest charges have <a href="https://www.abc.net.au/news/2023-05-03/record-high-living-costs-businesses-contracting-interest-rates/102296992">risen by 78.9% over the year</a> to March 2023. For many homeowners, their repayments are unaffordable compared to when they first took out their mortgage.</p>
<p>If you are struggling to afford your mortgage, the first step is to talk to your lender as soon as possible. Moneysmart has <a href="https://moneysmart.gov.au/home-loans/problems-paying-your-mortgage">useful information</a> on what to do when you can’t meet your mortgage payments.</p>
<p>You may also be able to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-super/access-on-compassionate-grounds/access-on-compassionate-grounds---what-you-need-to-know/">access some of your superannuation</a> so you don’t lose your home, however bear in mind that this is a temporary solution and uses your retirement savings.</p>
<p>Increased demand for rentals has seen average rents across Australia increase by <a href="https://content.corelogic.com.au/l/994732/2023-07-05/z2tcd/994732/1688600749Ly8Iv9wt/202306_CoreLogic_RentalReview_July_2023_FINAL.pdf">27.4% since the COVID pandemic</a>. Supply of rental properties is low, which means many people may not be able to find a suitable alternative if their rent increases and becomes unaffordable.</p>
<p>It might be necessary to take on a housemate, or move to a cheaper location (make sure to consider additional costs such as transport). If your circumstances have changed suddenly and you cannot pay your rent, contact your landlord or property manager.</p>
<p>If you are paying a lot in credit card or other personal debt repayments such as numerous Afterpay-style accounts, it could be a good idea to speak to a bank about consolidating.</p>
<p>This can help move some expensive debt, such as that from credit cards, into lower interest debt and simplify your budgeting as there is only one payment. If debt is making your budget unmanageable, then you can call the <a href="https://ndh.org.au/">National Debt Helpline</a> or for First Nations Australians there is <a href="https://financialrights.org.au/getting-help/mob-strong-debt-help/">Mob Strong Debt Help</a>.</p>
<p>A final option could be to increase your income by taking on more work. This can be a good solution, but if you already work full time it might be unsustainable. Two common side hustles to boost income are gig work, such as Uber driving, and multi-level marketing, which is selling goods like Doterra and Herbalife to family and friends.</p>
<p>However, both are <a href="https://www.twu.com.au/wp-content/uploads/2023/03/McKell_QLD_Gig-Economy_WEB_SINGLES.pdf">low</a> <a href="https://eprints.qut.edu.au/216593/1/MLM_report_Print.pdf">paid</a> and in most cases you would be better off earning minimum wage as a casual employee.</p><img src="https://counter.theconversation.com/content/210895/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Laura de Zwaan has received funding from Ecstra Foundation and the Financial Basics Foundation. She is a member of the Financial Planning Academic Forum and has previously been a member of the Wealth Academy Advisory Board. </span></em></p>They won’t make you rich but there are simple steps to take to ease the pressure on your finances when you are earning less money than you owe.Laura de Zwaan, Lecturer, Department of Accounting, Finance and Economics, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2110682023-08-21T13:47:46Z2023-08-21T13:47:46ZHow rising interest rates are affecting UK businesses<figure><img src="https://images.theconversation.com/files/543717/original/file-20230821-23-2hink2.jpg?ixlib=rb-1.1.0&rect=0%2C33%2C7326%2C4858&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-business-owner-working-his-shop-2199248649">Stock-Asso/Shutterstock</a></span></figcaption></figure><p>From <a href="https://www.theguardian.com/business/2023/aug/03/were-just-treading-water-uk-small-business-owner-higher-interest-rate-taking-their-toll?utm_term=64ccabd424ac776f6436d425fc8da30c&utm_campaign=BusinessToday&utm_source=esp&utm_medium=Email&CMP=bustoday_email">chip shops</a> to <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">tech start-ups</a>, and even large, <a href="https://www.standard.co.uk/news/uk/wilko-administration-high-street-retail-interest-rates-b1098476.html">well-established companies</a>, rising interest rates have had an impact right across the business world. After <a href="https://theconversation.com/how-the-bank-of-englands-interest-rate-hikes-are-filtering-through-to-your-finances-210344">14 consecutive base rate hikes by the Bank of England</a> since 2021, this is causing particular problems for companies with a lot of debt. </p>
<p>We recently saw the chaos this can cause when English utility <a href="https://www.bbc.co.uk/news/business-66051555">Thames Water</a> nearly collapsed under the weight of its debt and had to seek emergency funding from its shareholders earlier this year. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-thames-water-came-to-be-flooded-with-debt-and-what-it-means-for-taxpayers-208788">How Thames Water came to be flooded with debt – and what it means for taxpayers</a>
</strong>
</em>
</p>
<hr>
<p>More recently, budget retailer Wilko’s borrowing not only affected the business and its shareholders, but also its employees when its recent collapse put <a href="https://www.wionews.com/business-economy/uk-retailer-wilko-collapses-due-to-big-debts-12500-jobs-at-risk-624323">12,500 jobs at risk</a>.</p>
<p>Similar problems could arise among many other companies and industries. Financial markets expect the bank base rate – which dictates the rates on many types of loans – will keep climbing: it’s currently <a href="https://www.thetimes.co.uk/money-mentor/article/when-will-interest-rates-go-down-uk/">forecast to peak</a> between 5.75% and 6% by the start of 2024. And the <a href="https://www.statista.com/statistics/793368/value-of-business-corporate-loans-united-kingdom/">total value of UK business loans</a> is also expected to rise to an estimated £513 billion as of 2023. This is £78 billion higher than in 2018, an increase of 18%.</p>
<p>Company insolvencies have <a href="https://www.reuters.com/world/uk/england-wales-report-40-rise-company-insolvencies-2023-06-16/">already jumped by 40%</a> over the year to May 2023 in England and Wales – the highest level since monthly records began in January 2019. And significant debt problems within an industry or even one firm can cause a domino effect across the UK economy. </p>
<p>Research shows the effects of an insolvency or bankruptcy <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/spreading-the-misery-sources-of-bankruptcy-spillover-in-the-supply-chain/B87035D235D7AA2A443B5164C28EBA5B">can spread</a> to a firm’s trading partners. Wilko started to defer supplier payments and extend the timeframe in which it settles invoices <a href="https://www.retailgazette.co.uk/blog/2022/09/wilko-delays-supplier-payments/">last year</a> to try to ease pressure on its cash flow as it struggled to manage its debts.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/wilko-is-the-latest-shop-to-be-edged-out-by-competition-but-it-doesnt-have-to-mean-the-end-for-the-budget-retailer-211161">Wilko is the latest shop to be edged out by competition but it doesn't have to mean the end for the budget retailer</a>
</strong>
</em>
</p>
<hr>
<p>So, with interest rates likely to continue to rise, being able to tell if another company or industry is at risk is important for customers, employees, investors and other connected businesses such as suppliers.</p>
<h2>The rising cost of business borrowing</h2>
<p>The average cost of new borrowing from banks by private non-financial companies was <a href="https://www.bankofengland.co.uk/statistics/money-and-credit/2023/june-2023">6.36% in June 2023</a>, more than 4 percentage points above the December 2021 rate of 2.03% (when the Bank of England base rate increases began). For small and medium-sized enterprise (SMEs), new loan rates increased from 6.86% in May to a record high of 7.13% in June (compared with 2.51% in December 2021). </p>
<p>Companies already holding debt that’s not on a fixed rate of interest could also see an increase in the interest owed to their lender. This could come as a shock since UK interest rates were <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">1% or less</a> for more than 13 years from February 2009 to June 2022. During this time, the pressure of debt on borrowers was light or negligible.</p>
<p><strong>The base rate has recently climbed from low levels</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing the Bank of England base rate rising from less than 1% in 2020 to 5.25% by August 2023. by" src="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=433&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=433&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543679/original/file-20230821-23-2cqa28.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=433&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Bank of England base rate from January 2020 to August 2023.</span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/explainers/what-are-interest-rates">The Bank of England</a></span>
</figcaption>
</figure>
<p>Companies that got used to being able to borrow at a low cost are now starting to feel the pinch, or even come under extreme pressure if they are heavily indebted. This is what worsened the <a href="https://news.sky.com/story/thames-water-secures-additional-750m-from-shareholders-in-race-to-avoid-nationalisation-12918285">financial position of UK utility Thames Water</a>. When the company was privatised in 1989, it had no debt. But over the years it borrowed heavily to fund new investments. </p>
<p>Generally speaking, debt is a <a href="https://www.ofwat.gov.uk/thames-debt-and-water-sector-finance/">prudent low-cost source of finance</a> with low interest rates fixed for the long term. But Thames Water borrowed too much. It had <a href="https://www.bbc.co.uk/news/business-66051555">£14 billion in debt by the end of June 2023</a>, which amounted to 80% of the value of the business and made it the most heavily indebted of England and Wales’ water companies, according to analysts. Its loan repayments were not only linked to the bank base rate, but also inflation, which has also spiked over the past year. This triggered fears about the company’s ability to continue to service its debts.</p>
<p>Thames Water was lucky, in a sense – it avoided being nationalised because it was able to secure timely funding from its shareholders. But the situation revealed the extent of the iceberg under the water in this industry. Shortly afterwards, another English utility, Southern Water, announced <a href="https://www.reuters.com/world/uk/britains-southern-water-suspends-dividend-amid-growing-debt-pile-rating-2023-07-07/">it would not pay dividends</a> until at least 2025 after its credit rating was downgraded. This shows investors, lenders and credit ratings agencies are getting more nervous about debt-related trends within industries.</p>
<p>Businesses can help to ease such concerns by being transparent.
<a href="https://onlinelibrary.wiley.com/doi/full/10.1002/bse.3055">Research</a> shows that the more firms disclose financial and non-financial information, the more likely they are to be able to secure loans and access lower rates. This also applies to companies that are <a href="https://www.sciencedirect.com/science/article/abs/pii/S0167268117302263">more open with external partners</a> by sharing resources and knowledge to enhance innovation. The more information a bank has, the more comfortable it will be about lending to a company. It also reduces the bank’s own risk rating, allowing it to lend more and offer lower rates. </p>
<figure class="align-center ">
<img alt="Man in suit with blue tie holding three blocks showing bank symbol, rating symbol and chart symbol with arrow and percentage, with " src="https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543720/original/file-20230821-15-ev2p8p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Credit ratings influence how much and to which companies banks will lend.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/credit-rating-concept-finance-banking-investment-2248616763">Panchenko Vladimir/Shutterstock</a></span>
</figcaption>
</figure>
<h2>What to look out for in the current environment</h2>
<p>Business leaders that are addressing rising interest rates head-on may announce adjustments to their growth or expansion plans, especially if a plan previously relied heavily on debt. They may also consider different sources of finance. The UK water regulator, for example, has called on utilities to consider the role of equity funding (<a href="https://www.british-business-bank.co.uk/finance-hub/what-is-equity-finance/">for example, selling shares</a>) and <a href="https://www.ofwat.gov.uk/thames-debt-and-water-sector-finance/">not just debt</a> in financing new investment.</p>
<p>A company’s <a href="https://www.investopedia.com/terms/d/debtratio.asp#:%7E:text=The%20debt%20ratio%20is%20defined,that%20are%20financed%20by%20debt.">ratio of debt versus assets</a> will also tell you how much it holds in debt. A “good” debt ratio is around 1 to 1.5, but <a href="https://www.british-business-bank.co.uk/finance-hub/what-level-of-debt-is-healthy-for-business/">the ideal can vary</a> by industry. Manufacturers, for example, tend to need a lot of equipment and so may have ratios greater than 2.</p>
<p>More interest rate rises will pile pressure on companies, employees and the economy. But by anticipating the impact on their debt and being more open about their current state and future plans, businesses can help to minimise the pain.</p><img src="https://counter.theconversation.com/content/211068/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erwei (David) Xiang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Recent interest rate hikes are not just a problem for mortgage borrowers, many companies are suffering too.Erwei (David) Xiang, Senior Lecturer (Associate Professor) in Accounting, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2110092023-08-18T11:12:18Z2023-08-18T11:12:18ZClimate change is making debt more expensive – new study<figure><img src="https://images.theconversation.com/files/543226/original/file-20230817-14573-wkk79g.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5004%2C3333&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tokyo-japan-august-26-2021-sign-2178575211">Ned Snowman/Shutterstock</a></span></figcaption></figure><p>Earth is overheating due to the greenhouse gas emissions from burning fossil fuels. This is “the biggest market failure the world has seen” according to economist <a href="https://www.aeaweb.org/articles?id=10.1257/aer.98.2.1">Nicholas Stern</a>. The rational behaviour of companies that pollute by making profitable commodities, and consequences of most people’s desire to drive everywhere are creating irrational outcomes for everyone: an increase in the average global temperature which threatens to make the planet uninhabitable. </p>
<p>But our <a href="https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4869">recent research</a> indicates that this pollution will have a direct financial cost. We used artificial intelligence to combine Standard and Poor’s (S&P) <a href="https://www.spglobal.com/ratings/en/about/intro-to-credit-ratings">credit ratings formula</a> (which captures the ability of those who borrow money to pay it back) with climate-economic models to simulate the effects of climate change on sovereign ratings for 109 countries over the next ten, 30 and 50 years, and by the end of the century.</p>
<p>We found that by 2030, 59 countries will see a deterioration in their ability to pay back their debts and an increased cost of borrowing as a result of climate change. Our predictions to 2100 entail the number of countries rising to 81.</p>
<p>Financial markets and businesses need credible information on how climate change translates into material risks to be able to factor them into all decisions they make. Although it is important to design economic tools and policies that can mitigate the effects of climate change, the field of economics responsible for doing so is relatively young. </p>
<p>New financial products have emerged to help countries and investors take better account of the climate and environment being degraded as a result of debt markets, but several problems remain.</p>
<p>Credit ratings or environmental, social and governance (ESG) ratings (which assess how well a company manages these kinds of risks) are not based on scientific information, and are often charged with <a href="https://www.ft.com/content/74888921-368d-42e1-91cd-c3c8ce64a05e">greenwashing</a>. For example, some investment funds branded as green according to these ratings, have been <a href="https://www.theguardian.com/business/2023/may/02/green-investment-funds-pushing-money-into-fossil-fuel-firms-research-finds">linked to fossil fuel companies</a>.</p>
<p>Financial institutions such as banks frequently misunderstand models for predicting the economic costs of climate change and underestimate risks such as <a href="https://www.ft.com/content/a5027391-41a4-4e21-a72d-f8189d6a7b71">temperature rises</a>, according to a <a href="https://actuaries.org.uk/media/qeydewmk/the-emperor-s-new-climate-scenarios.pdf">recent report</a> by actuaries – people who use mathematics to measure and manage risk and uncertainty.</p>
<p>Their research found “a clear disconnect” between climate scientists, economists, the people building these economic models and the financial institutions using them. </p>
<p>In our study, we tried to integrate climate science into financial indicators widely used and understood by investors, such as credit ratings. Without such science-based indicators, financial decision making will reflect risk calculations which are incorrect and misrepresent the <a href="https://www.nature.com/articles/s41558-020-00984-6">economic consequences</a> of climate change.</p>
<h2>Debt servicing to rise almost everywhere</h2>
<p>Credit ratings express a country’s ability and willingness to pay back debt and affect the cost of borrowing to nations as well as other entities, such as corporations and banks. Inevitably, these costs are passed on to the public.</p>
<p>When interest rates rise for banks, businesses find it more expensive to fund their operations and so raise prices for consumers. Higher costs to banks also mean higher mortgage interest rates for residential borrowers. When banks invest savings such as pensions in bonds offered by countries hit by climate disasters, their worth is affected too, meaning that pensions may fall in value.</p>
<p>Our <a href="https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4869">paper</a> has three key findings. First, in contrast to much of the economics literature, we found that climate change could have material effects on economies and credit ratings as early as 2030. </p>
<p>Credit ratings are categorised in a 20-notch ladder scale, with default being the lowest rating, equivalent to one notch, and AAA being the highest rating at 20 notches. The highest rating signifies the lowest risk of an entity not paying back its debts and vice versa.</p>
<p>Under a high-emissions scenario in which recent emissions continue on an upwards trajectory, 59 countries would suffer downgrades of just under a notch by 2030, rising to 81 countries facing an average downgrade of two notches by 2100.</p>
<p>The nations which would be most affected include Canada, Chile, China, India, Malaysia, Mexico, Slovakia and the US. More importantly, our results show that virtually all countries, whether rich or poor, hot or cold, will suffer downgrades if the current trajectory of carbon emissions is maintained.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A global map depicting how much each country's credit rating is expected to fall." src="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Rating downgrades under a high-emissions scenario (20-notch scale).</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Second, if countries honoured the <a href="https://unfccc.int/sites/default/files/english_paris_agreement.pdf">Paris Agreement</a> and limited warming to below 2°C, the impact on ratings would be minimal.</p>
<p>Third, we calculated the additional costs of servicing debt for countries (best interpreted as increases in annual interest payments) to be between US$45–67 billion (£35-53 billion) under a low-emissions scenario, and US$135–203 billion under a high-emissions one. These translate to additional annual costs of servicing corporate debt, ranging from US$9.9–17.3 billion to US$35–61 billion in each case.</p>
<p>As climate change batters national economies, debt will become harder and more expensive to service. By connecting climate science with indicators that are already baked into the financial system, we’ve shown that climate risk can be assessed without compromising the integrity of scientific assessments, the economic validity of the modelling and the timeliness necessary for making effective policies.</p>
<hr>
<figure class="align-right ">
<img alt="Imagine weekly climate newsletter" src="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong><em>Don’t have time to read about climate change as much as you’d like?</em></strong>
<br><em><a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeTop">Get a weekly roundup in your inbox instead.</a> Every Wednesday, The Conversation’s environment editor writes Imagine, a short email that goes a little deeper into just one climate issue. <a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeBottom">Join the 20,000+ readers who’ve subscribed so far.</a></em></p>
<hr><img src="https://counter.theconversation.com/content/211009/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrycja Klusak receives funding from the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).</span></em></p><p class="fine-print"><em><span>Matt Burke receives funding from the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).</span></em></p>The first ‘climate-smart’ sovereign credit rating shows 59 nations will have lower ratings before 2030 without emissions cuts.Patrycja Klusak, Affiliated Researcher, Bennett Institute of Public Policy, University of Cambridge and Associate Professor in Banking and Finance, University of East AngliaMatt Burke, WTW Research Fellow, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2105272023-08-10T12:41:29Z2023-08-10T12:41:29ZBeyoncé has a prenup − but do you need one if you’re not a millionaire?<figure><img src="https://images.theconversation.com/files/541566/original/file-20230807-26-p288xv.jpg?ixlib=rb-1.1.0&rect=152%2C49%2C2815%2C1877&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A prenup allows couples to separate their debt from the debts of their spouse.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/beyonce-and-jay-z-perform-during-the-global-citizen-news-photo/1067795190?adppopup=true">Kevin Mazur via Getty Images </a></span></figcaption></figure><p>A prenuptial agreement can seem like something only high-profile people like <a href="https://www.hellomagazine.com/brides/494142/jeff-bezos-prepares-jaw-dropping-prenup-to-protect-his-138billion-fortune/">Jeff Bezos</a> – with his US$138 billion fortune to protect – actually need.</p>
<p>But prenups – contracts entered into before marriage that detail how assets will be divided in the case of divorce – can be a good idea for anyone going into a marriage, according to <a href="https://doyledivorcelaw.com/blog/9-reasons-you-need-a-prenuptial-agreement/">lawyers</a> and <a href="https://www.psychologytoday.com/us/blog/bringing-compassion-matrimonial-law/201810/the-unexpected-upside-getting-prenup">marriage counselors</a>. They have been in regular use since 1983, when a group of attorneys and law professors drafted the <a href="https://helloprenup.com/upaa/">Uniform Premarital Agreement Act</a>, a set of rules regulating prenups that 28 U.S. states have since adopted. </p>
<p><a href="https://theharrispoll.com/briefs/popularity-of-prenups-rising-2022/">A recent poll</a> showed that the percentage of couples with prenups has risen from 3% in 2010 to 15% in 2022. <a href="https://www.newyorker.com/news/us-journal/prenups-arent-just-for-rich-people-anymore">Nearly 40%</a> of married or engaged couples between the ages of 18 and 34 have signed prenups, while just 13% of couples between 45 and 54 have done so. </p>
<p><a href="https://scholar.google.com/citations?user=6kPZNuMAAAAJ&hl=en&oi=ao">As a law professor</a> who specializes in family law, I teach my students what prenups are and how to make sure they stand up in court. I also <a href="https://law.richmond.edu/faculty/atait/">write about</a> what happens to property when couples get divorced, especially unique forms of property like <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3036997">family businesses</a> or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3259129">trust funds</a>. </p>
<h2>A shield from unwanted debt</h2>
<p>But prenups can be about more than what you own – they can also be about what you owe.</p>
<p>Millennials have accumulated <a href="https://fortune.com/2023/02/27/millennials-debt-pandemic-credit-interest-rates/">more debt</a> than previous generations, and prenups can help millennial couples navigate some of the concerns about debt in marriage. They can help couples address questions about the shared debt incurred during the marriage and who will pay what if the marriage ends. For example, couples can agree in a prenup to allocate <a href="https://www.tateesq.com/learn/prenup-student-loans">student loan debt</a> to the person who took out the loan. </p>
<p>They can also choose to protect one person from the other’s <a href="https://www.newyorker.com/news/us-journal/prenups-arent-just-for-rich-people-anymore">medical debt</a>, especially if they know that large medical bills are on the horizon. Prenups can insulate one spouse from potential debt and financial risk from their <a href="https://state48law.com/benefits-of-a-prenuptial-agreement-for-business-owners/">partner’s business</a>. </p>
<figure class="align-center ">
<img alt="A couple signs a prenup agreement." src="https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/541349/original/file-20230806-20589-vq6fu7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Prenups allows couples to make their own rules rather than being at the mercy of state laws.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/couple-who-signs-a-contract-at-a-new-residence-royalty-free-image/1124316087?phrase=a+couple+signing+a+prenup&adppopup=true">kokouu/E+ via Getty Images</a></span>
</figcaption>
</figure>
<h2>A shield from state laws</h2>
<p>Couples may also be drawn to prenups because these agreements allow them to make arrangements that, if executed correctly, take precedence over state laws.</p>
<p>When you get divorced, you can either follow the terms in a prenup or the terms that state law provides and be at the mercy of a divorce court’s estimation of who should get what. </p>
<p>State rules that generally divide all assets and debt equally were initially created for divorcing couples with conventional and gendered household patterns. For example, stay-at-home mothers raising children, working fathers with full-time employment, and assets like a house, life insurance and pension. </p>
<p>Younger couples are likely to organize their <a href="https://www.pewresearch.org/social-trends/2020/05/27/as-millennials-near-40-theyre-approaching-family-life-differently-than-previous-generations/">households much differently</a>. Both spouses <a href="https://www.forbes.com/sites/avivahwittenbergcox/2020/10/13/the-rise-resilience-and-challenges-of-2-career-couples/">generally work</a>. Expectations about who is responsible for child rearing <a href="https://www.nytimes.com/2015/07/31/upshot/millennial-men-find-work-and-family-hard-to-balance.html">are more varied</a>. Millennials and Gen Z workers are frequently <a href="https://www.buzzfeednews.com/article/annehelenpetersen/millennial-burnout-cant-even-anne-helen-petersen">freelance employees</a> or independent contractors, with less income security and fewer benefits like employer-provided pensions or health and life insurance. </p>
<p>Prenups are a helpful way to address these emergent work-life arrangements. For example, one spouse can choose to keep their income or pension benefits as separate property, not to be divided upon divorce.</p>
<h2>New ways to draft a prenup</h2>
<p>New platforms like <a href="https://helloprenup.com">Hello Prenup</a> – a “Shark Tank” success story – can be helpful for younger couples. The company aims to make the prenup process more accessible and less costly – think Turbo Tax but for prenups. Online platforms like Rocket Lawyer or Legal Templates, which provide outlines for all kinds of legal documents, also offer a <a href="https://www.rocketlawyer.com/sem/prenuptial-agreement?id=1319&partnerid=103&cid=15098121101&adgid=134763364211&loc_int=9008455&loc_phys=9109325&mt=b&ntwk=g&dv=c&adid=450847162998&kw=prenuptial%20agreement%20form&adpos=&plc=&trgt=&trgtid=kwd-29682911&gad=1&gclid=CjwKCAjw5remBhBiEiwAxL2M955oQgvm6K7G5HI0VwPv9dOAPRh95YgbNtrlS-rnXrW3wsEAK1J_bRoC8SAQAvD_BwE">prenup template</a>. </p>
<p>These platforms provide state-specific documents and explain the process, walking clients through things like <a href="https://helloprenup.com/prenuptial-agreements/can-online-prenups-be-valid/">financial disclosure rules</a> that are important if a prenup ever ends up being questioned in court.</p>
<h2>A valuable conversation</h2>
<p>Prenups make the news because of celebrity agreements and sensational provisions, like <a href="https://www.yahoo.com/entertainment/16-times-contents-celeb-couples-181602719.html">fidelity clauses</a> or <a href="https://www.usmagazine.com/celebrity-news/pictures/celebrity-couples-with-and-without-prenuptial-agreements/">sobriety requirements</a>. However, for most couples, these items are less important. Many people draft prenups to feel financially safe and know what will happen if they divorce. </p>
<p>One of the most significant benefits of prenups is that they get couples to talk about their financial lives and what it might look like to merge – or separate – finances as a part of marriage. And, considering conflicts around money are one of the <a href="https://www.thejimenezlawfirm.com/what-percent-of-marriages-end-in-divorce-because-of-money/">biggest causes of divorce</a>, prenup conversations may be the best kind of wedding planning you can do.</p><img src="https://counter.theconversation.com/content/210527/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Allison Anna Tait does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A prenuptial agreement can help millennial couples navigate concerns about student debt in their marriage.Allison Anna Tait, Professor of Law, University of RichmondLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2085512023-06-30T23:08:24Z2023-06-30T23:08:24ZNow that President Biden’s student loan cancellation program has been canceled, here’s what’s next<figure><img src="https://images.theconversation.com/files/535057/original/file-20230630-17-t6th2o.jpg?ixlib=rb-1.1.0&rect=58%2C91%2C5501%2C3609&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Supreme Court rejected President Joe Biden’s plan to eliminate $430 billion in student loan debt</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/supporters-of-student-debt-forgiveness-demonstrate-outside-news-photo/1364662050?adppopup=true">Olivier Douliery/AFP via Getty Images</a></span></figcaption></figure><p>The Supreme Court has struck down the Biden administration’s student loan forgiveness plan. In <a href="https://www.oyez.org/cases/2022/22-506">Biden v. Nebraska</a>, the court ruled 6-3 on June 30, 2023, that the secretary of education <a href="https://www.supremecourt.gov/opinions/22pdf/22-506_nmip.pdf">does not have the authority</a> to forgive US$430 billion of student loans under the <a href="https://www.forbes.com/sites/alisondurkee/2023/02/28/student-debt-forgiveness-at-supreme-court-tuesday-heres-what-you-need-to-know/">Health and Economic Recovery Omnibus Emergency Solutions Act</a>. </p>
<p>That kills the president’s proposed plan to forgive <a href="https://apnews.com/article/supreme-court-affirmative-action-student-loans-gay-rights-elections-a3007709350cd1606d5ce9ac4de957a6">up to $10,000</a> in student loans per borrower for those with incomes under $125,000 per year, or $250,000 per year for couples. Under the president’s plan, those who <a href="https://studentaid.gov/debt-relief-announcement">received Pell Grants</a> would have been eligible to cancel up to an additional $10,000 in student loans.</p>
<p>Just hours after the decision, <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/06/30/fact-sheet-president-biden-announces-new-actions-to-provide-debt-relief-and-support-for-student-loan-borrowers/">President Biden announced a new effort</a> to <a href="https://www.nytimes.com/2023/06/30/us/politics/higher-education-act-student-loans-biden.html?action=click&module=Well&pgtype=Homepage&section=US%20Politics">forgive student loans under the Higher Education Act of 1965</a>.</p>
<p>To give borrowers time to “<a href="https://www.nytimes.com/live/2023/06/30/us/student-loans-supreme-court-biden/63644601-96e5-50cb-85d5-ef0a657c09d3?smid=url-share">get back up and running,</a>” Biden stated that the Education Department won’t refer borrowers who don’t pay their student loan bills to credit agencies for 12 months.</p>
<h2>Secretary lacks authority</h2>
<p>In the majority opinion, Chief Justice John Roberts – joined by his five other conservative colleagues – stated “The HEROES Act allows the Secretary to ‘waive or modify’ existing … financial assistance programs under the Education Act, but <a href="https://www.oyez.org/cases/2022/22-506">does not allow the Secretary to rewrite that statute</a> to the extent of canceling $430 billion of student loan principal.” </p>
<p>Currently, <a href="https://studentaid.gov/sites/default/files/fsawg/datacenter/library/PortfolioSummary.xls">over 43 million Americans owe $1.64 trillion</a> in federal student loans, with an <a href="https://www.foxbusiness.com/personal-finance/student-loan-payments-resume-impact-on-credit">average balance of $46,000</a>. Student loan borrowers haven’t had to make payments on their federal loans – or accrue interest on those loans – <a href="https://studentaid.gov/announcements-events/covid-19/payment-pause-zero-interest">since March 2020</a>, when the Trump administration put the payments on pause due to the COVID-19 pandemic.</p>
<figure class="align-center ">
<img alt="Supporters of student debt forgiveness demonstrate outside the US Supreme Court in Washington, DC." src="https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=380&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=380&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=380&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=477&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=477&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535060/original/file-20230630-29-e4vl0c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=477&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Roughly 1 in 8 Americans will have to restart loan payments as soon as September 2023.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/activists-and-students-protest-in-front-of-the-supreme-news-photo/1247556593?adppopup=true">Andrew Caballero-Reynolds/AFP via Getty Images</a></span>
</figcaption>
</figure>
<p>But that will change on <a href="https://studentaid.gov/announcements-events/covid-19">Sept. 1, 2023</a>, when interest will once again begin to accrue on outstanding student loans. Payments on the actual loans is set to resume in October 2023.</p>
<p>When payments resume, the average student loan payment is expected to be between <a href="https://www.wsj.com/articles/who-could-be-left-behind-in-the-supreme-courts-student-loan-ruling-in-six-charts-d5d3d637">$200</a> and <a href="https://educationdata.org/average-student-loan-payment">$500 per month</a>. For those that resume making their federal student loan payments on time, this may lead to an <a href="https://www.vantagescore.com/major-credit-score-news-new-federal-debt-ceiling-law-ending-student-loan-forbearance-to-impact-credit-scores/">increase in their credit score</a>, while those that miss the first payment after payments resume can expect their credit score to fall.</p>
<p>Prior to the student loan pause, approximately <a href="https://www.nerdwallet.com/article/loans/student-loans/fresh-start-what-student-loan-borrowers-in-default-need-to-know">7.5 million borrowers</a> – out of 43 million – were in default on their federal student loans.</p>
<p>These borrowers can apply for the <a href="https://studentaid.gov/announcements-events/default-fresh-start">Fresh Start program</a>. For borrowers who are behind on their federal student loan payments, this program allows student loan borrowers to reset their loan so they won’t be considered past due anymore. </p>
<p>In addition, any negative entries on their credit report due to being behind on their student loans will be removed. About 80% of Fresh Start borrowers enroll in an <a href="https://studentaid.gov/manage-loans/repayment/plans/income-driven">income-driven repayment plan</a>. Such a plan calculates a borrower’s monthly federal student loan payment <a href="https://studentaid.gov/announcements-events/default-fresh-start#questions">based on the borrower’s income, spouse’s income and family size</a>. Monthly payments under this plan will not exceed 20% of the borrower’s income. Those with <a href="https://www.debt.org/students/income-based-repayment-loans/">larger families and lower incomes</a> have lower monthly payments. Currently, about half of the Fresh Start borrowers pay $0 a month.</p>
<p>It is estimated that student loan borrowers pay about <a href="https://www.forbes.com/sites/simonmoore/2023/06/29/resuming-student-loan-payments-may-slow-economic-growth/">$70 billion a year</a> on their federal student loans. Any economic benefit that borrowers may have gotten from the suspension of student loan payments is likely to have already been <a href="https://theconversation.com/who-benefits-from-a-break-on-federal-student-loan-payments-an-economist-answers-3-questions-174228">absorbed into the economy over the past three years</a>. In other words, any money borrowers had to spend as a result of the student loan pause has already been spent. </p>
<p>With the resumption of student loan payments, there will likely be a small but <a href="https://www.forbes.com/sites/simonmoore/2023/06/29/resuming-student-loan-payments-may-slow-economic-growth/">negative impact on the economy</a>. This reduction in spending on goods and services is estimated to <a href="https://www.forbes.com/sites/simonmoore/2023/06/29/resuming-student-loan-payments-may-slow-economic-growth/">reduce economic growth by about 0.4%</a></p>
<p>When student loan borrowers begin to repay their loans in October, those dollars will no longer be available to pay for other things like food, rent, clothing or gas. So it won’t only hurt the economy, but it will hurt people, too.</p><img src="https://counter.theconversation.com/content/208551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Chittenden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Supreme Court rejected President Joe Biden’s student loan program that aimed at delivering up to $20,000 of relief per borrower.William Chittenden, Associate Professor of Finance, Texas State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2076212023-06-18T22:45:37Z2023-06-18T22:45:37ZKnow thyself, know thy finances: which of the 5 money personalities are you?<figure><img src="https://images.theconversation.com/files/532311/original/file-20230616-13202-mzflma.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C5071%2C3383&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>When it comes to money, are you a big spender or a fearful saver? Do you give away all your money or ignore financial demands until they become urgent? </p>
<p>After decades of focus on financial literacy, it has become clear there is more to how we manage our money than access to information. Now new research has identified five distinct money personalities that drive how we spend.</p>
<p>Commissioned by Te Ara Ahunga Ora (Retirement Commission) for their free, independent personal finance site <a href="https://sorted.org.nz/">Sorted</a>, <a href="https://assets.retirement.govt.nz/public/Uploads/Financial-Capability-Research/Report-Money-Personality-Tool-Project-AUT-vFINAL.pdf">our study</a> included an extensive review of the research on personality traits, values and attitudes. We then created an online survey, completed by nearly 500 New Zealanders, exploring how people engaged with their money. </p>
<p>The research findings form the backbone of a <a href="https://sorted.org.nz/tools/money-personality-quiz">new online money personality quiz</a> designed to help people understand their money personality and inform their financial decisions and behaviour.</p>
<p>With New Zealand <a href="https://www.rnz.co.nz/news/business/492013/new-zealand-in-recession-as-gdp-falls-for-second-quarter">officially in a recession</a>, it has never been more important to understand money management. Despite our best intentions, we often struggle to make “good” financial decisions consistently – including saving enough, using debt wisely, and staying on top of insurance policies and KiwiSaver.</p>
<h2>Doing better with our money</h2>
<p>According to Te Ara Ahunga Ora, New Zealanders are <a href="https://assets.retirement.govt.nz/public/Uploads/Research/TAAO-RC-NZ-FinCap-Survey-Report.pdf">good with the basics of financial capability</a> – budgeting and keeping track of money. But we score lower than comparable countries like Canada, Norway, Australia and Ireland on more advanced financial capabilities like long-term savings. We also lack confidence when it comes to our cash.</p>
<p>There is a growing body of evidence that personality traits, money values and attitudes each play a crucial part in either aiding or hindering us making those “smart” financial decisions. </p>
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Read more:
<a href="https://theconversation.com/the-coming-storm-for-new-zealands-future-retirees-still-renting-and-not-enough-savings-to-avoid-poverty-179661">The coming storm for New Zealand’s future retirees: still renting and not enough savings to avoid poverty</a>
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<p>Attitudes towards saving, the degree to which we value material possessions, and how comfortable we are with risk, will all affect the financial decisions we make – and, as a result, our financial wellbeing. </p>
<h2>The 5 money personalities</h2>
<p>We identified five distinct money personalities, each with their own strengths and weaknesses: the enterpriser, socialite, minimalist, contemporary and realist.</p>
<p><strong>An enterpriser</strong> is a financially confident, future-orientated planner who enjoys looking after their finances and is proud of being money savvy. Their strengths include self-control, financial knowledge and making their money work for them. </p>
<p>An enterpriser is unlikely to make impulsive or emotional purchases. However, their aspirational approach – viewing money as a priority and a symbol of success – may pair badly with materialism, causing them to spend money to gain status rather than for value or utility. Enterprisers benefit from learning about investing and planning for the future.</p>
<p><strong>The minimalist</strong> is frugal, confident with their saving ability, and on top of their financial situation. Minimalists value a simpler life, scoring low on materialism and are not prone to impulsive or emotional purchases. </p>
<p>Their weakness is not always making their money work as hard for them as it could, as they are less likely to take financial risks – even where there is a potential for higher investment returns. Low-cost, passive investment strategies may appeal to minimalists.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">New research has identified five distinct money personalities that can help explain how different people manage their money.</span>
<span class="attribution"><span class="source">Jordi Salas/Getty Images</span></span>
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<p><strong>A socialite</strong> is a joyful risk taker, outgoing, and confident with their money handling. A generous extrovert, they are more likely to be materialistic than other personality types and tend to live for today rather than plan for tomorrow. </p>
<p>Their high tolerance for risk suggests some socialites may take on unwise levels of financial risk. Those in this group who are also impulsive or prone to emotional purchases may find themselves overspending or vulnerable to over-extending themselves with consumer debt. </p>
<p>Socialites may like to explore active investment strategies and riskier investment classes, however. Taking calculated risks and building financial resilience is an important focus for them.</p>
<p><strong>A contemporary</strong> doesn’t enjoy managing their money and they lack confidence when it comes to financial matters. They are likely to say they’re a spender despite being less materialistic than others; living for today, they tend to engage in impulsive emotional spending and are generous to a fault. </p>
<p>For contemporaries, the focus is increasing financial resilience by paying down debt and building an emergency savings fund, enabling them to share their wealth with others without affecting their own financial well-being. Working on their money mindset and general financial knowledge may allow them to build confidence and savings, then take a passive or “set and forget” approach to their financial life.</p>
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Read more:
<a href="https://theconversation.com/a-400-a-week-shortfall-people-in-their-40s-face-a-bleak-retirement-on-kiwisavers-current-trajectory-185576">A $400-a-week shortfall: people in their 40s face a bleak retirement on KiwiSaver's current trajectory</a>
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<p><strong>A realist</strong> is future-focused, very conservative with risk, and values money highly. But they are not confident with their money handling, despite paying close attention to their financial situation. </p>
<p>The most introverted personality type, a more aspirational realist may be materialistic but is unlikely to make impulsive or emotional purchases a habit. This suggests building confidence and encouragement to take appropriate investment risks is important. Given they do not like making money decisions, automation of bill payments and savings may appeal. </p>
<h2>Know thy money self</h2>
<p>Each money personality offers different challenges when it comes to making financial decisions. </p>
<p>Taking Sorted’s money personality quiz is fun, but it’s also a useful financial decision you can make right now. </p>
<p>It’s not just about the label. Knowing your money personality can help you understand your strengths and weaknesses when it comes to financial decision making, giving you tools to improve your financial resiliency and security.</p><img src="https://counter.theconversation.com/content/207621/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Te Ara Ahunga Ora commissioned this research project in partnership with Sorted. Ayesha Scott has received funding from the Auckland University of Technology (AUT) and AUT Business School. Ayesha collaborates with Good Shepherd NZ and BNZ and has consulted for KiwiSaver providers as an independent expert reviewer.</span></em></p><p class="fine-print"><em><span> Te Ara Ahunga Ora commissioned Aaron Gilbert to conduct this research project in partnership with the Sorted team. He has also received research funding from the Auckland University of Technology (AUT) and AUT Business School. </span></em></p>A new study by the Retirement Commission has identified the different personality characteristics that influence how we manage our money – you can test your own with their online quiz.Ayesha Scott, Senior Lecturer - Finance, Auckland University of TechnologyAaron Gilbert, Professor of Finance, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2059842023-06-02T12:40:32Z2023-06-02T12:40:32ZHow do credit scores work? 2 finance professors explain how lenders choose who gets loans and at what interest rate<figure><img src="https://images.theconversation.com/files/528651/original/file-20230526-25352-b6trtr.jpg?ixlib=rb-1.1.0&rect=9%2C0%2C6300%2C4209&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">One way to get a good credit score is to pay bills on time every month.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/smart-phone-showing-credit-score-on-a-screen-royalty-free-image/899198984?phrase=credit+score+">tolgart/iStock via Getty Images Plus</a></span></figcaption></figure><p><em>With the cost of borrowing money to buy a home or a car inching ever higher, understanding who gets access to credit, and at what interest rate, is more important for borrowers’ financial health than ever. Lenders base those decisions on the borrowers’ credit scores.</em></p>
<p><em>To learn more about credit scores, The Conversation consulted with two finance scholars. <a href="https://www.business.msstate.edu/directory/dbb109">Brian Blank</a> is an assistant professor of finance at Mississippi State University with <a href="https://scholar.google.ch/citations?user=VxWst50AAAAJ&hl=en">expertise related to how firms allocate capital</a>, as well as <a href="https://www.tandfonline.com/doi/abs/10.1080/10527001.2021.2008094">the role of credit in mortgage lending</a>. His colleague at Mississippi State, <a href="https://www.business.msstate.edu/directory/twm75">Tom Miller Jr.</a>, is a finance professor who has written <a href="https://doi.org/10.2139/ssrn.3381211">a book on consumer lending</a>, in addition to providing his expertise to policymakers.</em></p>
<h2>Credit scoring assesses the likelihood of default</h2>
<p>Lenders stay in business when borrowers pay back loans. </p>
<p>Some borrowers consistently make prompt payments, while others are slow to repay, and still others default – meaning they do not pay back the money they borrowed. Lenders have a strong business incentive to separate loans that will be paid back from loans that might be paid back. </p>
<p>So how do lenders distinguish between good borrowers and risky ones? They rely on various proprietary credit scoring systems that use past borrower repayment history and other factors to predict the likelihood of future repayment. The three organizations <a href="https://www.myfico.com/products/fico-blp">that monitor credit scores</a> in the U.S. are <a href="https://www.transunion.com/">Transunion</a>, <a href="https://www.experian.com/lpt/credit-score-tmpl.html">Experian</a> and <a href="https://www.equifax.com/equifax-complete/Equifax/">Equifax</a>.</p>
<p>Although 26 million of 258 million credit-eligible Americans <a href="https://www.fico.com/blogs/more-232-million-us-consumers-can-be-scored-fico-score-suite">lack a credit score</a>, anyone who has ever opened a credit card or other credit account, like a loan, has one. Most people don’t have <a href="https://www.capitalone.com/learn-grow/money-management/starting-credit-score/">a credit score before turning 18</a>, which is usually the age applicants can begin opening credit cards in their own name. However, some people still have <a href="https://www.capitalone.com/learn-grow/money-management/bad-credit-vs-no-credit/">no credit later in life</a> if they don’t have any accounts for reporting agencies to assess. </p>
<p>Credit scores simply <a href="https://www.equifax.com/personal/education/credit/score/what-is-a-credit-score/">summarize how well individuals repay</a> debt over time. Based on that repayment behavior, the credit scoring system assigns people <a href="https://www.equifax.com/personal/education/credit/score/credit-score-ranges/">a single number ranging from 300 to 850</a>. A credit score ranging from 670 to 739 is generally considered to be good, a score in the range of 580 to 669 would be judged fair, and a score less than 579 is classified poor, or subprime.</p>
<p>The two most <a href="https://www.myfico.com/credit-education/whats-in-your-credit-score">important factors in credit scores</a> are how promptly past debts have been paid and the amount the individual owes on current debt. The score also takes into account the mix and length of credit, in addition to how new it is.</p>
<p>Credit scores can <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/">help lenders decide</a> what interest rate to offer consumers. And they can affect banks’ decisions concerning access to mortgages, credit cards and auto loans. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A smiling woman looks at her computer while holding a credit card in her right hand." src="https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/528664/original/file-20230526-15-p46mkk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">A good credit score is reason to celebrate because it means you have access to cheaper borrowing.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/senior-woman-at-home-royalty-free-image/1361629869?phrase=good+credit+score+&adppopup=true">milan 2099/E+ via Getty Images</a></span>
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<h2>Recent improvements in consumer credit scores</h2>
<p>Average credit scores in the United States have risen from 688 in 2005 <a href="https://www.fico.com/blogs/average-us-ficor-score-716-indicating-improvement-consumer-credit-behaviors-despite-pandemic">to 716 as of August of 2021</a>. They stayed steady at <a href="https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/">that level through 2022</a>.</p>
<p>While <a href="https://www.cbsnews.com/news/credit-card-debt-how-to-reduce/">credit card debt is at a record high</a>, the average consumer was <a href="https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/">using just over a fourth</a> of the revolving credit to which they had access as of September 2022. </p>
<p>As of 2021, nearly half of U.S. consumers <a href="https://www.fico.com/blogs/average-us-ficor-score-716-indicating-improvement-consumer-credit-behaviors-despite-pandemic">had scores considered very good</a> – meaning in the range of 740 to 799 – or excellent (800-850). Six in 10 Americans <a href="https://www.lexingtonlaw.com/blog/finance/credit-score-statistics.html">have a score above 700</a>, consistent with the general trend of record-setting credit scores of the past few years. These trends might, in part, reflect new programs that are designed to note when individuals pay bills like rent and utilities on time, <a href="https://www.experian.com/consumer-products/score-boost.html">which can help boost scores</a>.</p>
<p>During the first quarter of 2023, <a href="https://twitter.com/odetakushi/status/1658207063527268363">people taking out new mortgages</a> had an average credit score of 765, which is one point lower than a year ago but still higher than the pre-pandemic average of 760.</p>
<h2>Credit score evolution from the 1980s to the 2020s</h2>
<p>Developed in the late 1950s, the first credit scores – FICO scores – were created to build a computerized, objective measure to help lenders make lending decisions. Before then, bankers relied on commercial credit reporting, the same system merchants used to evaluate the creditworthiness of potential customers based <a href="https://www.cnbc.com/select/when-did-credit-scores-start/">on relationships and subjective evaluation</a>.</p>
<p>The FICO credit scoring system was enhanced over the 1960s and ‘70s, and lenders grew to trust computerized credit evaluation systems. Credit scores really began to exert an influence on American borrowers beginning in the 1980s as FICO <a href="https://finance.yahoo.com/news/fico-became-credit-score-100000037.html">become widely used</a>.</p>
<p>A major goal of the credit score is to expand the pool of potential borrowers while minimizing the overall default rate of the pool. In this way, lenders can maximize the number of loans they make. Still, credit scores are imperfect predictors, likely because most credit models assume that consumers will continue to act in the same way in the future as they have in the past. In addition, <a href="https://www.jstor.org/stable/23015965">some believe</a> that <a href="https://www.minneapolisfed.org/article/2022/how-the-racial-wealth-gap-has-evolved-and-why-it-persists">various risk factors</a> make credit scores <a href="https://www.theguardian.com/commentisfree/2015/oct/13/your-credit-score-is-racist-heres-why">imperfect</a>. Credit modelers, however, continue to make <a href="https://www.latimes.com/business/story/2023-02-25/how-credit-scores-are-evolving-to-improve-access-to-credit">progress by making continuous</a> <a href="https://news.yahoo.com/here-are-the-5-biggest-changes-to-credit-scores-in-2022-144720319.html">technological innovations</a>. Even <a href="http://doi.org/10.3386/w31154">FinTech</a> lenders, which <a href="https://bootcamp.cvn.columbia.edu/blog/what-is-fintech/">strive to go beyond traditional credit models</a>, heavily rely on credit scores to set their interest rates.</p>
<p>Recently, “Buy Now, Pay Later” accounts have been added to credit scoring, while <a href="https://www.aarp.org/money/credit-loans-debt/info-2022/credit-report-scores-changes.html">medical debt has been removed</a>.</p>
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<figcaption><span class="caption">Staying under 30% of your credit limit can help increase your credit score.</span></figcaption>
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<h2>Credit scores might seem scary but can be useful</h2>
<p>Borrowers with <a href="https://www.npr.org/2023/05/16/1176382955/americas-debt-culture-is-a-complicated-journey-for-some-immigrants">poor or limited credit</a> have challenges building more positive credit histories and good credit scores. This challenge is particularly important because credit scores have become more <a href="https://blogs.worldbank.org/developmenttalk/leveraging-big-data-and-machine-learning-credit-reporting">widely used than ever</a> because of the increasing availability of data and <a href="https://www.vantagescore.com/press_releases/13-ways-credit-scores-have-changed-in-the-past-20-years/">growing precision</a> of credit models. </p>
<p>The availability of additional data results in <a href="https://www.vantagescore.com/press_releases/13-ways-credit-scores-have-changed-in-the-past-20-years/">more precise estimates of credit scoring</a>, which can improve access to credit for consumers who repay bills consistently over time. These so-called “boost programs” factor in other payments that consumers routinely make on a monthly schedule. Think of the number of bills that you auto pay. Boost programs add points to your credit score for the bills that you pay consistently. </p>
<h2>You can improve your credit score by making wise decisions</h2>
<p>Two of the most important <a href="https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/">ways to improve credit scores</a> are paying bills on time and ensuring that your credit report accurately reflects your payment history. Simply avoiding default is not enough. Timely payments are necessary. Someone who pays the bills every three months is “caught up” every quarter. But that consumer is 90 days delinquent four times a year. Being 90 days delinquent alarms creditors. So, someone who pays the bills every month will have a higher credit score at the end of the year. </p>
<p>Having more credit accounts <a href="https://www.nerdwallet.com/article/finance/raise-credit-score-fast">can also positively affect your credit score</a> because having these accounts shows that many lenders find you creditworthy. As a result, you might benefit from leaving credit accounts open if you make the wise decision not to access that credit. Warning! You must not use that extra credit access to spend more money and accumulate more debt. That decision is unwise. </p>
<p>Why? Because managing the ratio of debt to income is also <a href="https://www.wellsfargo.com/goals-credit/smarter-credit/improve-credit/good-credit-habits/">critical to a good credit score</a>. Debt-to-income ratios of <a href="https://www.chase.com/personal/credit-cards/education/basics/what-is-debt-to-income-ratio-and-why-it-is-important">36% or less</a> generally indicate individuals who have income to put toward savings, which is what all lenders are looking to see and one of the best ways to improve your credit.</p><img src="https://counter.theconversation.com/content/205984/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tom Miller Jr. is affiliated with Consumers' Research, a consumer advocacy organization founded in 1929. </span></em></p><p class="fine-print"><em><span>D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trends show credit scores are rising, with nearly half of all US consumers boasting ‘very good’ or ‘excellent’ numbers.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityTom Miller Jr., Professor of Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2062402023-05-30T14:53:33Z2023-05-30T14:53:33ZGhana and the IMF have struck a deal, but hard choices lie ahead<figure><img src="https://images.theconversation.com/files/529121/original/file-20230530-19-cxk0xk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GettyImages</span> </figcaption></figure><p>In <a href="https://www.imf.org/en/News/Articles/2023/05/17/pr23151-ghana-imf-executive-board-approves-extended-credit-facility-arrangement-for-ghana">mid-May</a> 2023 the International Monetary Fund (IMF) finally approved a US$3 billion 36-month arrangement with Ghana. It immediately disbursed the first tranche of US$600 million. </p>
<p>This is the second time in the past eight years that the country has approached the IMF. And it’s the 17th time since independence in 1957 – that’s roughly once every four years on average. </p>
<p>The first tranche of the latest loan is expected to be used to bolster Ghana’s foreign currency reserves and help stabilise the cedi as well as for budget support, <a href="https://www.saltwire.com/atlantic-canada/business/ghana-receives-first-600-million-tranche-of-3-billion-imf-loan-ghanas-finance-minister-100855477/#">according</a> to the finance ministry. </p>
<p>Ghana has been facing severe economic and financial challenges since early 2022. This has included <a href="https://www.aljazeera.com/news/2022/12/20/ghana-suspends-payment-of-most-external-debts">defaulting</a> on some of its domestic and international debt. In December 2022, Ghana declared a moratorium on its international debt and further technically defaulted in February 2023 after failing to pay a <a href="https://www.investopedia.com/terms/c/coupon.asp">coupon</a> - the interest rate paid on a bond - on one of its debts following the expiration of a grace period. </p>
<p>The country’s unsustainable debt levels forced the government to go back to the IMF for another bailout in <a href="https://www.imf.org/en/News/Articles/2022/07/13/pr22256-imf-staff-concludes-visit-to-ghana">July 2022</a>.</p>
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Read more:
<a href="https://theconversation.com/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems-187041">Ghana’s return to the IMF within three years underscores its deeper economic problems</a>
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<p>As an economist and risk analyst who has <a href="https://theconversation.com/ghanas-domestic-debt-restructuring-has-stalled-four-reasons-why-198239">written</a> about and researched Ghana’s economy and its IMF engagements, my view is that – despite the IMF deal – Ghana isn’t out of trouble yet. </p>
<p>Getting further tranches of IMF funding is dependent on Ghana showing progress on a range of <a href="https://www.imf.org/en/Publications/CR/Issues/2023/05/17/Ghana-Request-for-an-Arrangement-Under-the-Extended-Credit-Facility-Press-Release-Staff-533541">eight</a> IMF programme objectives and policies. For ease of analysis, I have put these under three themes: external debt arrangements; socioeconomic reforms – austerity and necessary trade-offs; and central bank reforms.</p>
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Read more:
<a href="https://theconversation.com/ghana-and-the-imf-debt-restructuring-must-go-hand-in-hand-with-managing-finances-better-191877">Ghana and the IMF: debt restructuring must go hand-in-hand with managing finances better</a>
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<h2>Debt restructuring under the G20 Common Framework</h2>
<p>Ghana will find it difficult to achieve substantial savings on external debt restructuring.</p>
<p>The IMF <a href="https://www.imf.org/en/News/Articles/2023/05/17/pr23151-ghana-imf-executive-board-approves-extended-credit-facility-arrangement-for-ghana">estimates</a> that Ghana faces a total financing gap of US$15.06 billion between 2023-26. Of this, US$4.5 billion (30%) is expected to be received through official financing from the IMF and World Bank. Another US$10.51 billion (70%) is expected as financing from savings gained from restructuring its external debt arrangements.</p>
<p>This means that Ghana must secure an average of US$2.6 billion yearly in external debt-service payments relief during the programme implementation from 2023 to 2026. It will have to do so under the <a href="https://www.imf.org/en/Blogs/Articles/2021/12/02/blog120221the-g20-common-framework-for-debt-treatments-must-be-stepped-up">G20 Common Framework</a> which was established by the world’s 20 largest economies in 2020. It is one of the main multilateral mechanisms for forgiving and restructuring sovereign debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=355&fit=crop&dpr=1 600w, https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=355&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=355&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=446&fit=crop&dpr=1 754w, https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=446&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/528595/original/file-20230526-25-aq8k4m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=446&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Analysis from the IMF shows Ghana needs external debt service relief of US$10.5 billion during the program period (2023-26) to help close the external financing gap.</span>
<span class="attribution"><span class="source">IMF Country Report No. 23/168</span></span>
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<p>But reaching deals with countries under the framework has proved to be difficult because of <a href="https://www.kenyans.co.ke/news/89444-china-counters-world-bank-imf-push-forgive-kenyas-multibillion-debt">major disagreements</a> between traditional Paris Club creditors such as France, Germany, Japan and Israel on one side and China on the other. China is an <a href="https://clubdeparis.org/en/communications/page/ad-hoc-participants">ad hoc</a> member of the club. The biggest bone of <a href="https://www.fitchratings.com/research/sovereigns/chinas-stance-on-multilateral-debt-relief-could-weaken-mdbs-preferred-creditor-status-04-04-2023">contention</a> is whether multilateral debt owed to the IMF, World Bank and others should be included in any sovereign debt restructuring exercise. </p>
<p>Multilaterals contend that their debt has <a href="https://documents1.worldbank.org/curated/en/578451563797490303/pdf/Preferred-and-Non-Preferred-Creditors.pdf">preferred creditor status</a> as they are often the lender of last resort to sovereigns. That is, its debt is <a href="https://www.nber.org/system/files/working_papers/w25793/w25793.pdf">senior</a> to all other government or bilateral creditors, which are in turn senior to commercial bonds and loans owed to private creditors. Thus, their argument goes, these multilaterals mustn’t be included in any sovereign restructuring. China <a href="https://www.fitchratings.com/research/sovereigns/chinas-stance-on-multilateral-debt-relief-could-weaken-mdbs-preferred-creditor-status-04-04-2023">disagrees</a>.</p>
<p>This has been a major stumbling block to achieving meaningful progress on official bilateral debt restructuring. For example, Zambia applied for support under the framework in 2021 and secured a 38-month <a href="https://www.imf.org/en/News/Articles/2022/08/31/pr22297-imf-executive-board-approves-new-extended-credit-facility-arrangement-for-zambia">extended credit facility</a> in August 2022. But by May 2023 it still hadn’t reached a final deal with creditors due to the ongoing disagreements. </p>
<p>Ghana also faces difficult negotiations with private creditors. Most are hesitant to support debt relief efforts because they have obligations to their shareholders, some of which include global pension funds. In Ghana’s case, private creditors account for US$17 billion (76%) of the US$22 billion external debt up for restructuring.</p>
<h2>Socio-economic reforms</h2>
<p>The IMF programme also comes with conditionalities, including the need for reforms in tax policy, revenue administration, governance reforms and public financial management. </p>
<p>The new agreement includes specific initiatives on the revenue side. Among these is removal of value added tax (VAT) exemptions for companies, which is expected to save 2% of GDP; and phasing out of corporate income tax holidays and exemptions and aggressive profit shifting schemes used by companies to reduce their tax payments. </p>
<p>Others are automatically adjusting fuel prices and electricity tariffs for exchange rate and inflation, and adopting a new <a href="https://link.springer.com/book/10.1007/978-3-030-83051-9">fiscal regime</a> for the extractive industries. This is meant to increase government’s share of the revenues from the mining and oil and gas sectors by improving monitoring and <a href="https://link.springer.com/chapter/10.1007/978-3-030-83051-9_7">cost auditing</a>, among others. </p>
<p>Ghana’s latest IMF programme seeks to protect - and in some instances increase - social sector spending in the areas of education, health and social protection while addressing regional disparities in access and outcomes. </p>
<h2>Domestic borrowing</h2>
<p>The IMF estimates that the Bank of Ghana financed the government’s budget through overdrafts to the tune of 7.2% of gross domestic product (GDP) in 2022. This was in contravention of the <a href="https://www.bog.gov.gh/wp-content/uploads/2019/09/Bank-of-Ghana-Amendment-2016-ACT-918.pdf">country’s law</a>, which sets a 5% threshold for this type of financing.</p>
<p>Central bank financing of fiscal deficits isn’t new. It became important following the 2008-09 global financial crisis and the COVID-19 pandemic due to increasing government debts and reduced tax revenues. The amount of central bank financing is often codified in law and subject to legislative approval in most countries.</p>
<p>To ensure discipline, the IMF has asked for the current law governing the central bank to be amended. This is to strengthen central bank independence and eliminate central bank financing of the budget deficit, which further drives inflation. The government would stop borrowing from the Bank of Ghana. There would be a clear definition of emergencies under which this limit could be temporarily lifted, and how it could be enforced. </p>
<h2>Conclusion</h2>
<p>Fixing Ghana’s external debt issues under the latest IMF programme would be highly challenging, given the recent experiences of Zambia and others under the G20 Common Framework. Ghana, like Zambia, may become a victim of the international geopolitics of debt, prolonging debt relief and making it even more vulnerable.</p>
<p>Also, while some governance reforms are proposed under the IMF programme, <a href="https://cddgh.org/wp-content/uploads/2022/02/Final-Report-CDD-Campaign-Financing-FCDO-11th-June-2021.pdf">political party campaign financing</a> is not addressed. This is a major part of the root causes of the country’s persistent fiscal and debt vulnerabilities, especially at <a href="https://blogs.lse.ac.uk/africaatlse/2022/06/06/how-party-finance-shapes-the-politicised-distribution-of-government-jobs/">state-owned enterprises</a>.</p><img src="https://counter.theconversation.com/content/206240/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Theophilus Acheampong is affiliated with the IMANI Centre for Policy and Education, Accra, Ghana.</span></em></p>Ghana’s deal with the IMF is the 17th in its history.Theophilus Acheampong, Associate Lecturer, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055092023-05-29T12:30:49Z2023-05-29T12:30:49ZChina in Africa: Kenya railway study shows investment projects aren’t a one-way street<figure><img src="https://images.theconversation.com/files/526558/original/file-20230516-21-6zqzqx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Yasuyoshi Chiba/AFP via Getty Images</span></span></figcaption></figure><p>China is an important economic player in Africa. In 2021 alone, China accounted for <a href="https://www.statista.com/statistics/277985/cash-flow-of-chinese-direct-investments-in-africa/">nearly US$5 billion</a> in foreign direct investment in African countries. The rapidly increasing Chinese presence across Africa has become a <a href="https://thesecuritydistillery.org/all-articles/on-the-contentious-subject-of-chinese-investment-in-africa">contentious issue</a> both for Beijing and African governments. </p>
<p>In particular, mega projects funded by China have resulted in public controversies about <a href="https://www.chathamhouse.org/2022/12/response-debt-distress-africa-and-role-china">the relationship between external investments and public debt</a>. China is Africa’s biggest bilateral lender. In 2020, it held <a href="https://blog.politics.ox.ac.uk/chinas-role-in-restructuring-debt-in-africa/#:%7E:text=China%20has%20become%20Africa's%20biggest,of%20the%20Sino%2DAfrican%20relationship.">over US$73 billion of Africa’s public debt and nearly US$9 billion of its private debt</a>. Due to this, US Treasury Secretary Janet Yellen has <a href="https://www.reuters.com/world/us-aims-counter-chinas-influence-global-institutions-yellen-says-2023-03-29/">accused China</a> of leaving countries “trapped in debt”. </p>
<p>Kenya has been <a href="https://www.swp-berlin.org/assets/afrika/publications/policybrief/MTA_PB04_2022_Eickhoff_Chinese_Mega_Projects_in_Kenya.pdf">no exception</a>. China’s involvement in the construction of Kenya’s <a href="https://www.railway-technology.com/projects/mombasa-nairobi-standard-gauge-railway-project/">Standard Gauge Railway</a> is a typical example of controversies brought by China-supported investments. These include issues of <a href="https://theconversation.com/kenyas-mega-railway-project-leaves-society-more-unequal-than-before-170969">increasing socio-economic inequalities</a> between different population groups advanced by large-scale investments, <a href="https://www.cambridge.org/core/journals/africa/article/abs/kenya-and-chinas-labour-relations-infrastructural-development-for-whom-by-whom/941619878769D48B555EA812E5B1828B">local labour mistreatment</a> by Chinese managers, <a href="https://www.theguardian.com/cities/2018/jul/31/china-in-africa-win-win-development-or-a-new-colonialism">accusations of neo-colonialism</a>, and the long-term <a href="https://www.theelephant.info/op-eds/2018/08/18/chinas-debt-imperialism-the-art-of-war-by-other-means/">sustainability of loans</a> issued by the Exim Bank of China for projects. </p>
<p>In 2022, with <a href="https://www.chathamhouse.org/2022/12/response-debt-distress-africa-and-role-china/02-case-studies-chinese-lending-africa">a total debt of US$6.83 billion</a>, China was Kenya’s biggest bilateral creditor. Out of this amount, <a href="https://www.chathamhouse.org/2022/12/response-debt-distress-africa-and-role-china/02-case-studies-chinese-lending-africa">US$5.3 billion</a> was advanced by the Exim Bank of China to finance the Standard Gauge Railway.</p>
<p>It is against this background that <a href="https://onlinelibrary.wiley.com/doi/10.1111/anti.12929">our study</a> asked if Chinese actors indeed determined how mega-infrastructures are realised in African countries. We examined the specific ways in which Chinese state-owned enterprises are involved in the construction of Kenya’s Standard Gauge Railway. We analysed how infrastructure development was realised on the ground and how Chinese construction companies shaped the process.</p>
<p>The study showed that the decisions of Chinese state-owned enterprises in Kenya do not necessarily present <a href="https://moderndiplomacy.eu/2022/01/01/the-chinese-grand-strategy-an-overview-of-the-causes-and-consequences-of-the-belt-and-road/">a grand Chinese strategy</a>. Instead, they result from changing political <a href="https://www.cambridge.org/core/journals/china-quarterly/article/global-china-at-20-why-how-and-so-what/3A9A1988E36546B0CE16F374D7A308D9">and economic circumstances</a> in China, and reflect both state and private Chinese interests. </p>
<p>Acknowledging these dynamics is important because it demonstrates how narratives about China’s involvement in mega-infrastructure development might overemphasise the power of the Chinese state. Simultaneously, this highlights that African governments have more power to influence their industrial development and the sustainability of large-scale projects than mainstream narratives acknowledge. </p>
<h2>Flagship projects</h2>
<p>Alongside other large projects, such as the Lamu Port-South Sudan-Ethiopia Transport <a href="https://www.lapsset.go.ke/">Corridor</a>, the Standard Gauge Railway is central to Kenya’s national development programme <a href="https://vision2030.go.ke">Vision 2030</a>. This is supposed to industrialise the country and advance socio-economic development.</p>
<p>But the sustainability of the railway project and its <a href="https://www.theelephant.info/op-eds/2018/07/21/sgr-by-the-numbers-some-unpleasant-arithmetic/">contribution to government debt</a> has been widely <a href="https://theconversation.com/kenyas-big-railway-project-makes-life-even-harder-for-the-poor-by-ignoring-their-reality-192789">debated</a>. In 2022, according to the National Treasury, <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/Medium-Term-Debt-Management-Strategy-2023.pdf#page=20">Kenya’s debt</a> stood at KSh9.15 trillion (US$74.1 billion), <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/Medium-Term-Debt-Management-Strategy-2023.pdf#page=18">equivalent to 67% of the country’s GDP</a>. There are also concerns whether Chinese contracts <a href="https://theconversation.com/kenya-standard-gauge-railway-contracts-what-released-documents-say-and-what-they-dont-194354">protect national interests</a>.</p>
<p>We took a closer look at the project to see if these fears were well founded. Between May 2019 and September 2020, we conducted interviews during multiple visits to Chinese construction camps alongside the railway construction sites. </p>
<p>We interviewed managers and employees in construction and operational departments of China Road and Bridge Corporation, the main railway project contractor. We interviewed informants from the public sector in Kenya, including from Kenya Railways Corporation and Kenya Ports Authority. We also spoke to local government workers, private sector representatives, lawyers and scholars.</p>
<p><a href="https://onlinelibrary.wiley.com/doi/10.1111/anti.12929">Our research</a> is unique because we directly engaged with the Chinese actors that built Kenya’s new railway. Their perspectives have been lacking in both public and academic debates. This is because public engagement of Chinese contractors is usually <a href="https://static1.squarespace.com/static/5652847de4b033f56d2bdc29/t/6099cc5d267fb10016b82045/1620692064252/WP+47+-+ZHANG%2C+Hong+-+Chinese+Intl+Contractors%27+Market+Power+Africa.pdf#page=4">strictly guarded</a> due to the state ownership of these enterprises. </p>
<p>Our interviews revealed that in Kenya, China Road and Bridge Corporation constantly shifted its strategies. It also adapted to local circumstances in the country and across East Africa, rather than only imposing its strategic priorities. This compromised its own interests of economic productivity and its public image. Our finding runs counter to any <a href="https://carnegieendowment.org/2017/05/09/xi-s-vision-for-china-s-belt-and-road-initiative-pub-69890">grand visions of transformative infrastructure development</a>, the lens through which Kenya’s rail project has been interpreted. </p>
<h2>The trade-offs</h2>
<p>We found that the Chinese entity had adopted a method called the “Early Entry Scheme” to resolve issues of delayed land compensation. This involved direct, case-by-case negotiated payments to landowners. As a result, owners vacated land for project construction before the land settlement was officially approved by the National Land Commission of Kenya. This is uncommon among international contractors. Land compensation for a national infrastructure project is usually a <a href="https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/Compulsory%20Acquisition%20of%20Land%20and%20Compensation%20in%20Infrastructure%20Projects.pdf">responsibility of national governments</a>. But with <a href="https://www.standardmedia.co.ke/article/2001300717/compensation-delay-halts-phase-2a-of-sgr-project-in-kajiado">the delayed national compensation process</a>, the China Road and Bridge Corporation resorted to the Early Entry Scheme. </p>
<p>In Kenya, this scheme was driven by various concerns. Cost-saving was one. The Chinese company had learnt from the first phase of the project that the late delivery of even a small parcel of land could raise the cost of the project if labour and equipment were idle.</p>
<p>Another concern was political. For a flagship project funded by the Chinese government, on-time delivery was crucial to promote China’s image as an efficient development partner.</p>
<p>Another interesting aspect of the project was how the Chinese company became the <a href="http://www.mn-sgr.com/aboutus/introduction/">main operator</a> of the Standard Gauge Railway – not just the construction contractor. According to our interviews, operating the railway would not benefit the company financially. But the stakes were too high to leave it to chance. Operational challenges that a new company could experience might have affected the public image of the project, as well as the corporation itself. Therefore, the company had to balance its short-term financial interests with long-term reputational concerns. </p>
<p>So far, there hasn’t been clear evidence of the Standard Gauge Railway contributing to Kenya’s <a href="https://asq.africa.ufl.edu/wp-content/uploads/sites/168/V19i3-4a3.pdf">national economic development</a>. The current investment in the railway between Mombasa and Naivasha (120km away from Nairobi) is not enough to boost the economy. This could only be realised if the railway connected global maritime trade to the hinterland of East Africa, to accelerate <a href="https://pdf.usaid.gov/pdf_docs/PA00JBZJ.pdf">transport efficiency</a> at a regional scale. But the Kenyan and Ugandan governments <a href="https://www.theeastafrican.co.ke/tea/business/uganda-refocuses-on-metre-gauge-rail-as-kenya-delays-sgr--1381268">did not manage to agree</a> on financing terms to extend the project.</p>
<p>For this reason, in 2018, the Exim Bank <a href="https://www.genghis-capital.com/newsfeed/chinese-bank-cuts-sh32bn-sgr-funds/">discontinued funding</a> for extending Kenya’s railway line to Uganda. This shows that Beijing’s strategies of infrastructure development are not set in stone but change, and can even be reversed, due to shifting circumstances in overseas regions. </p>
<p>Still, there are clear winners. Though the long-term profitability of Kenya’s Standard Gauge Railway <a href="https://www.constructionkenya.com/3201/negative-effects-sgr-kenya/">remains in question</a>, China Road and Bridge Corporation managed to <a href="https://www.enr.com/gdpr-policy?url=https%3A%2F%2Fwww.enr.com%2Fblogs%2F13-critical-path%2Fpost%2F44866-mind-bendingly-complex-efforts-rewarded-as-enr-2018-global-best-projects-winners">enhance its global market position</a>. In Kenya alone, despite the controversies that surround the new railway, the corporation was given <a href="https://www.scmp.com/news/china/diplomacy/article/3187354/china-backed-nairobi-expressway-opens-kenya-paving-way-more">new tenders</a> to complete other key national projects, such as the <a href="https://nairobiexpressway.ke/">Nairobi Expressway</a>.</p>
<p>As we show in our study, this is not necessarily an outcome of a grand strategy in Beijing. Instead, this is a result of dynamic and ever-changing efforts of Chinese companies that try to align multiple demands between their own economic interests and various political priorities in China and across Africa.</p>
<p>This highlights that African countries are not passive recipients of Chinese-funded projects. They have an important role to play in counterbalancing Chinese actors to shape how these projects are realised on the ground.</p><img src="https://counter.theconversation.com/content/205509/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gediminas Lesutis receives funding from the Horizon 2020, Marie Skłodowska-Curie Actions Individual Fellowship (Project ID: 101023118).</span></em></p><p class="fine-print"><em><span>Zhengli Huang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>African governments have more influence on China-funded projects than mainstream narratives acknowledge.Gediminas Lesutis, Marie Curie Fellow, University of AmsterdamZhengli Huang, Post-doctoral Researcher, Tongji UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2063232023-05-25T15:40:54Z2023-05-25T15:40:54ZTinubu inherits Nigeria’s high debt – an economist analyses what this means for the country’s future<figure><img src="https://images.theconversation.com/files/528311/original/file-20230525-27-wgw9aq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bola Ahmed Tinubu speaking at a Chatham House event, London, in December 2022. </span> <span class="attribution"><span class="source">Asiwaju Bola Ahmed Tinubu Facebook page </span></span></figcaption></figure><p>As the 16th president of Nigeria, <a href="https://theconversation.com/bola-ahmed-tinubu-the-kingmaker-is-now-nigerias-president-elect-200383">Bola Ahmed Tinubu</a> inherits an economy that is grappling with <a href="https://www.cbn.gov.ng/rates/inflrates.asp?year=2023">inflation</a>, <a href="https://theconversation.com/a-third-of-nigerians-are-unemployed-heres-why-159262">chronic unemployment</a>, <a href="https://theconversation.com/nigerias-poverty-profile-is-grim-its-time-to-move-beyond-handouts-163302">extreme poverty</a>, crumbling infrastructure and <a href="https://theconversation.com/nigerias-spiralling-insecurity-five-essential-reads-186696">insecurity</a>. </p>
<p>Nigeria’s debt profile stands out among these problems like a sore thumb. The country’s external debt stock – what it owes non-residents – was <a href="https://www.dmo.gov.ng/debt-profile/external-debts/external-debt-stock/4228-nigeria-s-external-debt-stock-as-at-december-31-2022/file">US$41.69 billion</a> in 2022. </p>
<p>Multilateral lenders accounted for almost half of this figure. Eurobonds accounted for about <a href="https://www.dmo.gov.ng/debt-profile/external-debts/external-debt-stock/4228-nigeria-s-external-debt-stock-as-at-december-31-2022/file">38%</a> of Nigeria’s external debt. Exim Bank of China accounted for <a href="https://www.dmo.gov.ng/debt-profile/external-debts/external-debt-stock/4228-nigeria-s-external-debt-stock-as-at-december-31-2022/file">US$4.3 billion</a>, or 86% of the $5 billion in bilateral debt.</p>
<p>The country’s public debt stock – what the government owes in total – was about <a href="https://www.dmo.gov.ng/news-and-events/dmo-in-the-news/press-release-nigeria-s-total-public-debt-stock-as-at-june-30-2022">US$100 billion</a> in 2022. </p>
<p>External debts present a bigger burden because they are denominated and serviced in foreign currencies. Changes in exchange rates, such as currency depreciation in a debtor country, can raise interest payments and negatively affect a country’s budget. And interest rates may rise. </p>
<p>As <a href="https://sites.allegheny.edu/econ/faculty-staff/stephen-onyeiwu/">an economist</a>, I argue that, while the country’s debt profile should be a concern, it need not hamper Tinubu’s ability to revitalize the Nigerian economy, and to reduce unemployment and poverty rates. </p>
<p>The most salient question is whether the current debt levels are sustainable. </p>
<h2>Debt sustainability</h2>
<p>Although economists use <a href="https://www.issai.org/wp-content/uploads/2019/08/GUID-5250-Guidance-on-the-Audit-of-Public-Debt-Appendix-1-Debt-Indicators.pdf">various indicators</a> to determine a country’s debt sustainability, two of those measures are widely used. One of the indicators is gross debt as a percentage of gross domestic product (also known as the debt-GDP ratio). In Nigeria it was <a href="https://www.cbn.gov.ng/Out/2022/RSD/Second%20Quarter%202022%20CBN%20Economic%20Report.pdf#page=33">38%</a> in 2022. The average for sub Saharan African countries was 56%. </p>
<p>A World Bank study shows that debt begins to hurt an economy, especially economic growth, when the debt-GDP ratio exceeds <a href="https://documents1.worldbank.org/curated/en/509771468337915456/pdf/WPS5391.pdf#page=2">77%</a>. Given this threshold, the debt-carrying capacity of the Nigerian economy is still strong. </p>
<p>Moderate and prudent additions to the country’s debt stock would not push it over the precipice of debt unsustainability, at least in the next few years. This does not mean that the country should go on a borrowing spree to finance frivolous and vanity projects. It simply means that the current debt level does not prevent economic growth, employment generation and poverty reduction.</p>
<p>Although the US is different from Nigeria, it has demonstrated that debt need not constrain economic vitality. The US debt-GDP ratio is about <a href="https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS?locations=US">120%</a>, but it has been able to reduce unemployment to <a href="https://www.bls.gov/eag/eag.us.htm">3.4%</a>, while holding inflation at <a href="https://tradingeconomics.com/united-states/inflation-cpi">4.9%</a>.</p>
<p>Another indicator of debt sustainability is the debt service ratio. This is the proportion of export earnings that is used to service a debt – that is, to pay back the principal and the interest. A healthy ratio is below <a href="https://www.un.org/esa/ffd/wp-content/uploads/2007/03/20070306_nihal-kappagoda-debt-sustainability-framework.pdf#page=11">18%</a>.</p>
<p>Nigeria had a debt-service ratio of <a href="https://data.worldbank.org/indicator/DT.TDS.DECT.EX.ZS?locations=NG">16.2%</a> in 2021, compared to 3.2% in 2015. The 2021 number shows that Nigeria is getting closer to the point where servicing its debt would become a problem. </p>
<p>But the Nigerian situation is not as dire as many African countries’, with an average debt-service ratio of <a href="https://data.worldbank.org/indicator/DT.TDS.DECT.EX.ZS?locations=NG">19%</a> in 2021. </p>
<h2>Revenue and spending</h2>
<p>To ease Nigeria’s growing debt burden, the Tinubu administration must address the country’s declining revenue. Nigeria has the <a href="https://www.worldbank.org/en/news/infographic/2022/11/21/nigeria-s-need-to-spend-more-and-better-revenue">fourth lowest</a> revenue-GDP ratio in the world. </p>
<p>Government revenue as a <a href="https://www.worldbank.org/en/news/infographic/2022/11/21/nigeria-s-need-to-spend-more-and-better-revenue">percentage of GDP</a> has declined from 13.5% in 2010-2014 to just 6.9% in 2020. The <a href="https://www.worldbank.org/en/news/infographic/2022/11/21/nigeria-s-need-to-spend-more-and-better-revenue">averages</a> for sub-Saharan Africa and the world in 2015-2020 were 20.1% and 24.2%, respectively. </p>
<p>Nigeria’s reliance on oil as a major source of revenue implies that <a href="https://www.cfr.org/blog/amid-oil-price-collapse-nigeria-running-out-foreign-exchange">revenue</a> will continue to fall, given uncertainties in the global oil market and <a href="https://www.reuters.com/markets/commodities/oil-theft-cost-nigeria-2-bln-jan-august-report-finds-2022-11-22/">rampant theft</a> of oil in the country. The World Bank’s <a href="https://www.worldbank.org/en/country/nigeria/overview">forecast</a> of sluggish economic growth (below 3%) in the next three years would also worsen the country’s capacity to generate revenue. </p>
<p>Meanwhile, government expenditure has been growing (except during the COVID era) faster than expected. The deficits will have to be covered by <a href="https://data.worldbank.org/indicator/NE.CON.GOVT.KD?locations=NG">borrowings</a>. More borrowing means that an increasing proportion of revenues generated will be devoted to debt service.</p>
<p>Because of dwindling revenue, Nigeria’s debt-revenue ratio was <a href="https://www.thecable.ng/theyre-cheaper-dmo-says-nigeria-reducing-debt-service-cost-by-accessing-world-bank-loans">80.6%</a> in 2022, which is far higher than the <a href="https://www.thecable.ng/theyre-cheaper-dmo-says-nigeria-reducing-debt-service-cost-by-accessing-world-bank-loans">22.5%</a> recommended for developing countries by the World Bank. </p>
<p>The ratio is expected to exceed <a href="https://bnn.network/breaking-news/economy/kpmg-warns-nigerias-debt-service-to-revenue-ratio-may-exceed-100-in-2023/">100%</a> by the end of this year. High debt-revenue ratios create a perpetual cycle of debt. Since revenues are used to service debt, the country must borrow to finance government expenditures. As the debt grows bigger, more revenue is devoted to debt servicing, which in turn increases the debt-revenue ratio. </p>
<p>While Nigeria’s debt-revenue ratio is very high, the ratio of external debt service to revenue is moderate at <a href="https://country.eiu.com/article.aspx?articleid=982147881&Country=Nigeria&topic=Economy&subtopic=Outlook&subsubtopic=Financial">20%</a> and below that of many other African countries. This means that, for every 100 naira in revenue, 20 naira is used to service external debt, leaving 80 naira for government expenditure and domestic debt service. </p>
<p>Although Nigeria’s debt-GDP ratio is <a href="https://guardian.ng/news/nigeria-not-under-any-debt-stress-dmo-insists/">sustainable</a> and below the levels specified by the IMF, it is worrisome that the external debt-GDP ratio has been rising during the past decade. It was just <a href="https://www.cgdev.org/topics/nigerian-debt-relief">9.3%</a> in 2010, five years after Nigeria reached a historic agreement with the Paris Club of creditor nations for debt relief worth <a href="https://www.dmo.gov.ng/publications/other-publications/nigeria-debt-relief/570-nigeria-s-debt-relief-deal-with-the-paris-club/file#page=3">$18 billion</a> and a $30 billion reduction in the country’s debt stock. </p>
<p>The debt-GDP ratio is now <a href="https://www.imf.org/en/Publications/WEO/weo-database/2023/April/weo-report?c=694,&s=NGDP_RPCH,GGR_NGDP,GGX_NGDP,GGXWDG_NGDP,&sy=2021&ey=2028&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1">38%</a> and is expected to reach <a href="https://www.statista.com/statistics/383195/national-debt-of-nigeria-in-relation-to-gross-domestic-product-gdp">43 percent</a> in the next five years. . Given dwindling government revenues, slow economic growth and rising expenditure needs, there are concerns that the government will continue to rely on borrowings to finance economic development.</p>
<h2>Digging out of debt</h2>
<p>The Tinubu administration should be careful not to worsen the country’s debt profile. </p>
<p>The incoming government should manage Nigeria’s debt very prudently, and avoid going back to the era of the early 2000s when the country’s debt-GDP ratio exceeded <a href="https://countryeconomy.com/national-debt/nigeria">50 percent</a>.</p>
<p>It should reduce the high cost of governance cost, eliminate wasteful spending and rein in corruption. </p>
<p>Perennial borrowing to solve economic problems can plunge the borrower into unsustainable and destructive indebtedness. </p>
<p>Given low revenue and the many projects needed to promote economic growth, employment generation and poverty reduction, the Tinubu administration will have to continue with the policy of deficit spending, financed mainly by domestic and external borrowing. </p>
<p>The question will not be whether to borrow, but how much. </p>
<p>Drastically reducing the cost of governance will be difficult if political patronage continues. </p>
<p>A long-term solution to Nigeria’s debt problem is to explore new sources of revenue. To change the <a href="https://www.state.gov/reports/2022-investment-climate-statements/nigeria/">current narrative</a> about how risky Nigeria is, the Tinubu administration should introduce policies that improve Nigeria’s economic fundamentals. </p>
<h2>Conclusion</h2>
<p>A country’s debt stock does not matter as much as the quality of its economic policies. Economic policies could result in budget surpluses that can be used to repay debt. </p>
<p>A starting point is to invest in physical capital and infrastructure (especially roads and electricity); provide access to capital for micro, small and medium-sized enterprises; and support agricultural development. </p>
<p>There is also an urgent need to diversify the economy, make it less reliant on oil and broaden the country’s very narrow revenue base. </p>
<p>One strategy is to resuscitate the moribund factories in Nigeria and promote agro-processing industries, so that the economy would generate more revenue from non-oil sources to finance government spending and projects.</p><img src="https://counter.theconversation.com/content/206323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Onyeiwu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nigeria’s debt profile is disturbing but shouldn’t hinder Bola Ahmed Tinubu’s ability to tackle unemployment and poverty.Stephen Onyeiwu, Professor of Economics & Business, Allegheny CollegeLicensed as Creative Commons – attribution, no derivatives.