The four most common debt traps that people fall into & the 60% solution for personal budgeting.

WeMoney

Let's talk about debt, baby. The head of accounting from Curtin University shares the 4 most common debt traps people fall into, and they aren't what you'd expect. We also breakdown the 60% solution for personal budgeting.

The following is a transcript taken from episode 8 of the We Talk Cents podcast. The transcript is created by AI software so it might not be perfect - please forgive any imperfections or grammatical errors.

SPEAKERS

Dan Jovevski, Saurav Dutta, Blaize Pengilly

Blaize Pengilly  00:09

Personal finance, budgeting, cash flow and investing don't have to be scary words. The We Talk Cents podcast is here to help you learn more about money and take control of your personal finances.

Blaize Pengilly  00:26

The We Talk Cents podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor.

Dan Jovevski  00:45

For more information, please check out wemoney.com.au

Blaize Pengilly  00:50

Good day and welcome to another installment of We Talk Cents. You're joined by me Blaize

Dan Jovevski  00:56

and me Dan.

Blaize Pengilly  00:57

Dan being the finance expert and me your resident spendaholic. On today's episode, we meet Saurav Dutta. He is the head of accounting at Curtin University. So he shares the four most common ways that people find themselves falling into debt. And we also take a look at the 60% solution provisioning. But before we get into that, there was some interesting news that came out last week about buy now pay later. Dan, what was the news?

Dan Jovevski  01:26

Blaize, the the strike securities investment commission or AASIC I have written a report detailing their findings on the state of affairs when it comes to the Barnett power sector. Now, they did find a similar report about two years ago and listed that back in 2018, that some of the issues with the sector that they will keep an eye on, where How often do people get into really bad situations when it came into using bio power products. Now, let's also remind listeners raw some, and plenty of good things about buying a pilot. But some of the interesting and probably what you would call disturbing trends that are emerging is that since 2002, where there was one in six people, they got themselves into financial difficulty when accessing financial products, that astounding increase to one in five Australians. And wise, if you look at the numbers a little more deeper, you'll see that it disproportionately impacts for about 49% of the respondents were aged between 18 to 29 years old. So that's half of the people that fall themselves into those traps. And it's probably easy to see the brain is probably taking over and saying Of course it makes sense. All those people going out there may always retail purchases and not really knowing the impacts that can actually have on their financial pictures. I think it's a pretty big report. This certainly Nick's view from the government. And the government, if we're really honest, is sort of seen by their palette or as one of Australia's greatest exports, it's gone to the US it's gone to the UK. But I think some of the emerging trends that we'll need to keep an eye on is what are the protections do a lot of young Aussies have, in terms of getting themselves into bad spots particularly buy now pay later? What was your thoughs, Blaize?

Blaize Pengilly  03:19

Well, I find it the the stats one in five doesn't actually sound that kind of bad to me. But I guess when you break it down, like that's 20% of the people using these services. And to think back to our first episode, where we looked at how Millennials are moving away from credit cards, and moving towards using services they buy now pay later, that seems pretty positive, because like we discussed in that episode, if you pay on time, you're there's no charge, there's no fee to you. So you're not paying any interest, however, to see that over in one year's time, the number of people missing repayments and having to cover cough up fees going from one to six to one and five. I think it's concerning. And moving forward. It will be interesting seeing where we are at this point next year to see if that trend continues. And then if the government has any, I don't know maybe if the government steps in or if there's any more regulation or anything put in place to prevent this from happening. So yeah, it'll be it'll be interesting to see how it progresses. But then while we're on the topic of debt, shall we should we continue and and bring in serve our guest today to talk about the four most common debt traps?

Dan Jovevski  04:37

Absolutely, Blaize. Let's do it.

Blaize Pengilly  04:39

All right. Let's talk about debt baby. Dan, what do you think is the easiest or most common way for someone to fall into debt?

Dan Jovevski  04:52

Blaize I finally share a personal experience that I've had. When I was about 19 years old. I jumped online one day I was about to go on a holiday, and I ended up applying for credit card. And to my surprise, I was approved. And this is going back, say 10 or so years ago, I didn't have to provide any information. And all of a sudden, I had this fancy piece of plastic that arrived in one nail. Now what happened afterwards also for the next two to three years was a journey of trying to manage repayments of constantly putting things on that credit card, and, you know, almost got into a situation where it became unmanageable. So I think for a lot of people, the earliest forms of credit they get into, particularly in their late teens and early 20s is a way that you we can fall into debt easily. But Blaize I have a feeling that we've we've got somebody that can maybe shed a little light on this space, and really help us understand how we might be able to avoid some of these debt traps.

Blaize Pengilly  05:54

Well, Dan, your feelings are correct, because today's guest has joined us to share the most common ways that people fall into debt. Originally hailing from New York City in the USA, our next guest now heads up the School of accounting at Curtin University in Western Australia. Back in the US, he influenced public policy in his role as academic fellow in the Office of Chief Accountant at the Securities and Exchange Commission. If that wasn't impressive enough, he's also been engaged by the New York State Attorney General's Office investigating billing practices, and was involved with the reparations of more than 400 million Swiss francs, from the Swiss banks to the Holocaust victims. He's authored a book and published more than 40 academic papers. With over 25 years of experience under his belt, he joins us now via zoom to share some of his vast knowledge. So wrap that up. Welcome to the show.

Saurav Dutta  06:45

Well, thank you, Blaize. Thanks, Dan. Thanks for having me on your show.

Blaize Pengilly  06:49

Sarauv, that is quite an impressive resume, you've accomplished so much in your career. Is there anything else that we've missed?

Saurav Dutta  06:58

Haha! Blaize was very generous with her remarks. But I've been lucky in the sense that I've gotten some opportunities throughout my career to make some impact and and in those, especially with the Holocaust victim fund, that was a that was a once in a lifetime experience. I was lucky to be part of that.

Blaize Pengilly  07:23

That's pretty remarkable. Now, sir, let's get into it. How do people get into debt? How easy is it to get into debt?

Saurav Dutta  07:30

Well, fundamentally, what happens is, people get into debt when they spend more than their very simple concept. If you're if you keep your spending to the level of your earnings, you'll never get into debt. But people generally try to spend more than they earn. And that's when you get into the debt. Now, is it always bad to spend more than what you're not necessarily there is an academy part in economics, which talks about rational expectations. What that means is people spend based not based upon their current earnings, but based upon what they believe that future earnings are going to be. Because as typically, people would enjoy a lot more when they're younger than then then when they're older. Young people have more utility from luxuries than older people do. However, as you age, you make more money. Most people as the is the salaries goes up. Whereas in earlier days in your youth, you get more enjoyment from spending, say for example, travel, people tend to travel when the in the late mid to late 20s. And it's much more fun traveling in that age. Then, instead mid 40s. When you have more obligations, you have kids in school, it's more difficult to travel. However, for most people, you make more money in your mid 40s than in your late 20s. So hence, when you're spending in your 20s and trying to pay off in the 40s it leads to debt in your early your You are the same thing goes with house and car. If you say try to save up enough money to buy our house, people would tend not to buy a house till the late to mid 50s. Whereas you want to live in our house when you have a young family in your 30s or mid 30s. So these are some of the reasons why people get into that that is they spent before they have the income and the savings. So some of the debt is how they because it lets you live the life you are entitled to much earlier because you pay it off later. However, what happens is if somebody is not disciplined, you end up taking more debt than you you'd be able to support causing some level of financial distress

Blaize Pengilly  10:00

All right sounds like good people spending for the money that they have or thinking about, they will earn in the future. Sounds like we're doing a lot of optimistic spending, and not really being grateful for what we have at the moment but spending for the future. Now, what would you say, are the most four common debt traps that are these are finding themselves in.

Saurav Dutta  10:22

Alright, so one of the things actually, if if the debt is manageable, if it is within manageable bounds, then people go through the traditional means of getting that. So that has basically a bank loan, or for a mortgage, or a bank loan for a car purchase, or leasing of the car, or even some low interest credit cards. However, when somebody has exhausted all of those avenues, and the cheap source of money is no longer available to them, then they go for the ones in the fridge. And that's when the debt traps come in. So what kind of the debt trap is primarily the payday loans is one of the major debt trap. Consumer leaves is another major debt trap, where are you don't listen lease from the manufacturer or the retailer because of the bad credit score, but you go to a separate organization to use it. So consumer is about the trap. Sometimes the lenders may want collaterals to give you the debt. And that's called blackmail, security. That usually causes a lot of distress. And the for the debt trap, is what we call is, unfortunately, is when people are in a lot of debt, and they're very vulnerable, and they want to clean up their records. Sometimes they take help of credit managers, which is what normally they should do. However, some of these credit managers are not. Not let's say, Well, I use the word kosher. Does that make sense? They're not necessarily pure, and they're not looking after people, the consumers interest. And they make people go even more deeper into the debt trap.

Dan Jovevski  12:08

Saurav, that absolutely an amazing breakdown of some of the core reasons why people get themselves into debt traps. And one thing that I really would love to know about I'm sure our listeners listeners would like to as well is for the folks that end up getting to the sense of not feeling like they've got any other options. So into a sense of desperation, or maybe going to providers that charge a lot of interest. What are these people thinking about what's going through their mind at the time as they go to apply for these products? And how are they thinking and feeling?

Saurav Dutta  12:39

So that's a good question, Dan. The primary reason why people get into zombie content, there are two factors to it. One is just illiteracy. So most people are some of the people are financially literate in the sense that they do not fully understand they're young enough, or they're youthful, and they don't fully understand the concept of money and the concept of payment. And believe that if they're getting the cash, they should be able to spend it if they expect the the lender to have done the due diligence, and given them the cash. So say for example, then if you ask come to me and say, Oh, can I have $1,000. And if I give you $1,000, you believe you have earned it and you can go and spend it. And if I'm the bank, you believe that I have done my due diligence and have ensured that you'd be able to pay back. However, sometimes, some of the lenders may not be on maybe unscrupulous and has the take advantage of the vulnerable. So that is one of the things that they get you into a bad product. Or if the consumer has not done their homework, they might get themselves into a bad contract. And thereby, and we can talk about it in more detail later. pd laws tend to be one of those bad contracts. But that's one of the reasons. And the second reason is sometimes unexpected things happen. So if you're in New York, we have a saying that the life changes in a New York minute. Got the concept of New York minute is actually much less than a minute. What's going on on the side? You know what New York minutes actually means?

Blaize Pengilly  14:24

I have. Because I watched that amazing movie with the Olsen twins in it code and your community.

Saurav Dutta  14:31

Because out of New York minute is, is actually much, much less than a minute, because it is how long does it take for the light the traffic light to turn from red to green, and the car behind you honk at you because you did not move. That's the neon sign which is actually a fraction of a second. But But going back to our that part. Yes. So the life could possibly change in any minute. Like for example and we'll hopefully We will talk about it later, the COVID pandemic, nobody anticipated this. And COVID pandemic caused a lot of economic stress, people lost jobs. And things did not work out as planned. The global financial crisis in 2008 2009, was another Southern shock into the system, where people's anticipation and their expectations were not met. When certain events such as those happen, then all of a sudden people find themselves in a debt that they cannot pay back. So supposing somebody has a very good job was about 200,000, and they've taken a dad that is manageable, it's about 40,000, and so on, but they lose the job and they have no much assets left. Now they find themselves in a debt trap. And once they have exhausted our good lenders, or reasonable lenders, then they find themselves trying to get easy cash from lots of favorable lenders. Another reason why people get into debt trap is again, the bad things like health reasons. So if somebody falls sick, and you don't have insurance, and you have to get a surgery, what do you do you like, after all, you know, money is not that important as the life of a loved one. And hence, you get into the debt. And if somebody is sick, you're not really thinking about money at that time. And that's when you're most vulnerable. And some of the lenders take advantage of that vulnerability and get you into a bad contract.

Blaize Pengilly  16:34

Saurav, would you say that we need a sort of Robin Hood in this situation, just stop the sort of untrustworthy, or maybe the lenders that don't have the consumers best interests at heart from from leading them into these debt traps?

Saurav Dutta  16:48

Well, that's a kind of a loaded question in the sense. You know, we, after all, live in a free society. I mean, one of the aspects of the free society is that we should have right, make money and pursue that economic interest. You know, as long as it does not break any laws. So when even though I'm calling them unscrupulous lenders, if they're playing within the legal framework, and coming up with the products, then this they have equal rights to make money, it is for the consumers to be educated and not go into these things. So as part of regulation, all that can be done is to make sure that the information is available. But if the if the government are the regulatory bodies is these are good products, these are bad products, then how are businesses going to come out and make profits? So it is the question of how much do you protect your populace, and how much opportunities you provide others. So that's a very delicate balance for government or the regulators to strike. So in Australia, in America, in most open and Western countries, the the place where they draw the line is, well, we'll give you enough opportunities to make the business or make your own product or develop a business model, which might actually take advantage of other people, as long as you fully disclose. Yeah, so in terms of business models, if business makes more money, it is probably because somebody else is either creating a lot of value or somebody else's losing a little bit of money to make excess return, the consumer will be paying a higher price. So while in free societies, we let businesses come up with innovative ideas to make money because that's what prompts innovation. We also want to provide some level of protection to our citizens. And that's where the regulators and governments have to strike a balance. We cannot over regulate and not let the businesses come up with innovative products, because that will storm innovations. And at the same time, we don't want too many businesses to come in and take advantage of our citizens. So in most in Australia, American most Western European countries, the balance of stripe between letting the businesses come up with the model, but at the same time, fully disclose it to the consumer. So it's the concept that is very simply called by the hour. So if you make the binary aware, everyone is an adult, everyone can make their own decisions. If somebody wants to do something that is stupid. We don't regulate against stupidity, right, we cannot regulate. So we let people make stupid decisions, but as long as they have the information necessary just to know that what they are doing might be stupid.

Dan Jovevski  19:59

Saurav. You definitely have a really good point there. And I think we might go a little bit deeper on this topic, because I think it's really fascinating is, what is your thoughts on structural inequality. So for people that may be living, sort of week to week, you know, they don't have as many economic opportunities, as I say, you know, also today sort of podcasts, there may be working job to job, the whole family has grown up in really underprivileged circumstances. And for those folks who may not have had the exposure, or the luxury of, you know, a good education or a good understanding of how to manage your finances. Do you think there's something in built within society that sort of tends people to be constantly sort of poor? Where they can't get ahead? Is there anything in your research that suggests that might be a phenomena worth exploring?

Saurav Dutta  20:50

Well, that's a really good question. That's already societal equity question. One of the things that has been explored, or to be explored even further, is say, even in high schools and all when people have to learn a little bit of physics and chemistry, and so on, which most people, most people that you mentioned about who are working from multiple jobs and have come from disadvantaged backgrounds, will perhaps never use in life. Why should we not include a class on personal finance in the ninth and 10th grade, which will actually benefit most people for the lifelong, much more than learning about the Newton's laws of motion. And our educational system needs to adapt to that and give people life skills early on in the high school, when it is mandatory, and not leave this is skills for the university. Because as we know, only a few privileged people get to go into the for the university education. Whereas in high school, I'm least in Western Australia, since it is mandatory, most people most population is going in there. And these skills ought to be taught much earlier in the high school and much earlier, like a 1415 to the children, and not wait for this to be taught at 2021 these are not that difficult concepts. And then the definitely not as difficult as understanding, say, the Newton's laws of motion or understanding organic chemistry. If you can teach basic calculus in high school, you should be able to teach basic personal finance in high school.

Dan Jovevski  22:37

Absolutely, Saurav. One of the things that we've seen, here at wemoney, in particular service that a lot of people that we've seen right now, who are attracted to understanding their money are often people that end up being saying their late 20s, early 30s, when they've gone through those painful mistakes, of getting into auto debt traps, keeping up with the Joneses, you know, spending beyond this sort of means and don't really recognize the ramifications of this until they reach those critical life events. Like for example, starting a family buying a home and just realizing they come to the party in a relationship, say for example, with a whole bunch of debt. What would be your message to young people right now say if you're, you know, perhaps your your your 20s, or you're approaching your sort of 30s, around some of the more sort of practical measures of recognizing that you might be in a problem when it comes to being in debt? And how do they will be your advice for them to maybe get themselves out of the situation as quick as possible?

Saurav Dutta  23:41

So Dan, to answer your question properly, for a person to be able to get out of the debt, the prerequisite for them to know is that they are really in debt, and they are in unsustainable debt. So let me answer that question. First. How do you know that you are in unsustainable debt that you have too much debt? Because some debt is not bad, but having too much debt is bad. And the primary thing is for people to recognize when they are in too much debt. And there are two measures that usually can identify when somebody has a lot of debt, what is called debt to income ratio, how much do you earn in a year, and how much of that do you have? So having a debt to income ratio of about 20% 25% is helping more than 40% you're getting into the danger zone. The other measure is so in general, with debt to income, we say that your normal debt other than your house, in a mortgage and so on your normal debt should not exceed about one third of your income, including the house debt, your mortgage and your car and so on. The total debt should not exceed More than your three years of anticipated income. So if somebody is making 100,000 right now, and they expect to grow that income 10% a year, so they'll get 110,000 next year and 121,002 years from now, they should not have that more than 30,000. So that's a, that's a pretty good measure. And that to 30,000 should include the mortgage, the house, the car loans, the boatloads of anything else. So that's a pretty good measure. And the second aspect of the debt is usually called the debt to asset ratio. So if you're, if you're buying if you're having debt, to justify assets, or like a house debt is not the same as debt incurred for travel, because in the house, the prices go up, you're still benefiting, how's that no mortgage is probably better than even car loan because a car depreciate whereas normally your house does not. So it is the debt to asset ratio is another good measure. And usually debt to asset ratio around 40 to 50%, is reasonably healthy. And when you're doing the debt to asset ratio, the person should also look at how volatile the value of the asset is. So like, for example, land and houses are not as volatile as say, if your most of your assets are an options on stock market, that tends to be more volatile. So, so all of a sudden, with the global financial crisis of COVID, your asset might drop 40% in a day, and now our debt to asset don't have them. So there are healthy levels of debt. And there are websites and government is which provides details as to what is a healthy debt level. Now, once you have, once a person has recognized that and have unhealthy debt, or unsustainable that they have to come up with a plan of how to reduce it. And usually the plan would entail some level of cutting down expenses, stop doing certain things that you're doing, stop picking up the bill every time you go out with our friends, or so on and stop, cancel some travel plans and so on. So like, for example, you know, even though COVID has disrupted most of the lives, and it has actually caused much disruption and much anxiety and anguish throughout the world, in Western Australia, we have been lucky that we have not been as affected. And we still most of us still have jobs and have income. However, one thing that has been affected is we are not able to travel as much out outside of the UAE. And hence, this might be a some time when people can actually take that budget that had kept for travel, and try to pay off their debt and get into a better financial standing, and take advantage of the situation and and build themselves up for the future.

Blaize Pengilly  28:00

Saurav, I found that really interesting about the healthy debt and what a healthy debt ratio is. But I would love to talk more about the deep fried debt or the unhealthy debt, and the four common debt traps that you mentioned earlier. So you have the payday loan, the consumer lease, the blackmail security, and the credit manager. Now, could you please go into a little bit more detail about each one of these traps? why they're a trap? And how people find themselves in them?

Saurav Dutta  28:30

Sure, let me explain them one by one, for example, payday loans. So the payday loans are very short term loan usually lasting for a week or so somebody needs a sudden infusion of cash. And the would do this, get into a payday loan. One of the reasons why people tend to get into loans and this kind of debt trap. Going back to Dan's question is sometimes and most of these people have some form of addiction, and that is a support that addiction and they can't wait to purchase it. So they can't wait for the salary to come in to purchase. So for an alcoholic or drug addict to saw, they have to support their addiction, and that's where they need that Southern cash office. Those are the bad reasons for it. However, there are there are some reasons that are unexpected reasons and you cannot blame them for it like health emergencies, or the car breaks down and you have to go to work and you have to have the car repair. So those are some of the legitimate reasons for why people need sudden cash at a very short notice. However, when they go to the payday loans, then there are organizations that provided that usually the terms are are not regulated because they don't charge interest in instead they charge fees. So since they don't charge interest or the call, call it don't charge interest. They don't fall out. Under the regulations for banking, but the fees could be exorbitant, which are not necessarily kept into our boat, they don't fall under the same guidelines or same regulations. So for example, with payday loans, they may say, Well, just to get the application, you have to pay $100 application. So for the $1,000 loan, if you have to pay the $100 application fee, that's already a 10% interest, even if you're paying it over a year, if you're paying it in a week, that compounds very quickly, interest rates exceeding 400% annualised. So it is, even though it is not called interest, they call it an application fee, but it is significant amount of the loan has is a quasi interest. And because of these lack of disclosures, some of these companies have had to pay fines exceeding about close to about $20 million $15 million to settle these losses. So that's one of the bad ones, the payday loans. And that's not just in Australia, that that kind of payday loans are also regulated in the US, and it's a big problem within the US. The other one is the consumer lease. So when you have to buy something, say like a television or a washing machine, you could have up to three options. One is you can buy it outright. with cash, you can buy it on your credit card and pay off the credit card, or you can lease it from the retailer. But to do any of these things, you need to have the post consumer needs to have reasonable consumer records and credit records for credit card companies to do it. However, when they have exhausted all of those possible outlets of getting cash, they may go into consumer leases, which is the rent by month and so on, where the price of rental is actually much higher than if you are owning the equipment. And in general, you peed over the over four or five years, and then you return it. But and you end up paying or the consumers end up paying interest rates of about 80% 90% annualized because the payments are small, but you're paying it over a much longer period of time. So that's another bad one. The third one is what they call the blackmail security. So blackmail security actually takes a tangent of something that is actually legitimate. If a lender has to give you cash, usually there, they can ask you for the collateral, I can say that's basically the age old practice of creditors, then those are the pawn shops, you want some money, give me your gold ring or a gold necklace. And when you get your money back, or you really pay me back, I'll give you back your collateral. So I keep it, I would usually keep a collateral. That is what more than what you're more. So now what they have done, the played up on that old very old concept going back 2020 500 years. And they said, Well, I don't necessarily need your gold necklace, I need something that you value more, even though it not may not have that much value. So let's say for example, an individual needs the car to get to work. While the car may not be of that much value, I give you a lot of money but hold the car as collateral. And that way I know that the borrower is going to prioritize paying my loan because if they do not pay my make my payments, they will lose the privilege of using the car because I'll take it from. And the same goes for a tractor for a farmer. If the farmer doesn't have the tractor, they cannot earn their living. So that's basically what is called a blackmail security. So I hold that just as a blackmail, to make sure you pre made that up in my cache. So that's the one and then the fourth one, which is a really bad one is there are unscrupulous provider that act as though their credit manager and they're trying to help you out of your debt. But they put you in situations where they alter your debt and get you into new companies, but they're not being forthright. And they get you into worse situation than you are previously by charging them exorbitant fees, consulting fees, and other kind of form of payments. And you are in worse position than you were before. So the government in that situation has other providers that are not for profit providers and so that can provide valid financial advice. So those are those are the primary four debt traps.

Blaize Pengilly  34:51

Saurav, when you want to choose how do you do you have any advice for choosing a trustworthy credit manager? I can imagine it must be awful feeling like you You find yourself in a lot of debt, you're reaching out for help. And then you could find yourself being swindled or stuck in more debt even again, how do you choose someone that's trustworthy?

Saurav Dutta  35:09

So, so one of the things is to go into the local government and look for not for profit agencies that do it. The government websites usually have lists List of people, most banks would have list of providers that are that provide credit manager services. So even like regular banks, the big four and legitimate banks have to provide that service on the list of providers. So going through those legitimate sources are good. Usually, they're not for profit organizations that do it. And one of the one of the red flags usually is if the credit manager charges, substantial amount of fees to provide advice, that should be a red flag, why are you going with them, go with somebody who would charge you no money, because these are usually organizations that are doing it for not for profit, and they get the funding from the government,

Blaize Pengilly  36:08

Awesome!

Dan Jovevski  36:09

Saurav, that was a phenomenal insight into the four common reasons why people find themselves into debt traps. And I think you've done a lot to educate our audience on how they might be able to overcome or even recognize the phases where they get themselves into a lot of debt. As we approach the holiday season, we're recording this podcast in November. What's your thoughts on people taking out loans during the Christmas period, because I think a lot of our listeners, they probably can already see what's going to happen. Christmas is a silly time where a lot of spinning occurs, people will probably take out a lot of loans for this period. But more importantly, the amount of ads that we see on TV and radio for like 0% balance transfers in January, kind of almost perpetuates the the course of the reasons why people may find themselves into this habitual cycle of having excessive credit card debt and personal loan debt. What are what are some of the things that you've seen in your career over this period of time? And what are some tips people they can take into the holiday season?

Saurav Dutta  37:11

Sure, thanks. Thanks, Daniel. It's a very timely question and a very valid question as well. Because as we know, when the holidays first run high, impulse control tend to vanish. People splurge a lot. During the holiday season, you always gobble up an extra cookie or take another scoop of ice cream. And the same goes with finances, people spend a little bit more money than they normally do in other months, November December tends to be more spending by consumers. And which is usually a good thing for the retailer's anyway. But for individual consumers who are spending more money, sonically, people can just spend about on average, more or less $1,000 more during November, December than they do in other months. So that's $1,000 more than your essential necessary purchases. And if you don't have that saved up to $1,000 in November, and December is about $2,000. And you're putting it on a credit card, usually you're paying for it over a longer period of time. And even if you say pay the bare minimum, you end up paying on a $2,000 initial purchase, people tend to pay up about 600 $700 in interest over the time, if they're only making the minimum payments. So it does happen that way. Usually, where does the spending happen? In Australia, actually, over the past years, about 50% of the spending happens with food and hospitality. So people go to restaurants more than drink or they go to parties more than hosts more parties. So it is mostly with the food hospitalities. Most all, as the household goods take up about 10 15%. So does the apparel and clothing purchases also spike up during this time? So what are what are the days of kind of making sure you have fun but at the same time? own don't splurge too much that you're in for it for the rest of 2021. Also, ever, ever few suggestions? First and foremost, make a budget. When you're sober, and you're going for this make a budget How much money do you have? How much do you think you will spend? How much are you going to earn in November, December? And what is that that can help me take you know $230 of debt isn't bad, but 2000 $3,000 of debt on December 31st is bad. So make a budget. How much does your spending this and then spread it out over the two three months. So try not to go over that pressure. Hollingworth make a budget tracker spending. It doesn't make sense to make a budget unless you know how much you have already spent. So every end of every week, you know, what you can how much more you can spend. So make a budget right now. And then at the end of every week, figure out well, how much have you spent excess over your necessary things? Not the food, not the, not the range. But what have you spent on splurging around in recreation over this thing. So once you've tracked your spending, that gives you almost a running score of how much more can you spend, or should you hold back or should you not go out to the bar this week and go out the next weekend. So other thing that usually is a good exercise, people buy gifts a lot, and they make purchases, the stores are going to run a lot of sales this year. One of the good experience with shopping is shop solo, don't go in groups and shopping because you grow go in groups in shopping, you tend to buy more, your friend says, Oh, this shirt looks really good on you. And now you buy it regardless of how much it costs. And so just shop solo, it helps a lot if you're shopping solo, because you're more conscious about how much you're spending, and you don't get given to your impulses as much. Another one is that no, like you're putting things on credit cards, to take advantage of a credit card rewards speed for your purchases using credit card rewards, that saves all your cash. So you can still get the thing but you can still get the item in can still buy it. But be careful and use the code copy what was out there for a reason use that this is the time to use them. And finally, the point that Dan mentioned, which is yes, this is also the time when a lot of the credit card offers come in of balance transfers and 0%, and so on. So get smart about those kind of offers. Just don't do it because it looks tempting other time be one of the things to look for when you're looking at it. And always the you know, the devil is always in the details. There is always in small print, just look at what is the deferred interest rate. So when they ask you for the credit card, they have to put it and they'll put it in small print, but look at what is the deferred interest rate. So if they give you a 0% balance transfer, it has a time limit, you have to pay it say by April 30 2021. The thing that as a consumer, you have to be aware what happens if you don't pay it on me one, how much penalties Do you have to pay. And that basically is covered in what they call deferred interest. And if deferred interest is way above your current credit card debt, say your current credit card rate is about 15%. And this new credit card offers you deferred interest rate of 25% it definitely is not worth it, you will not pay it early, which eventually. So 0% interest rate card is not a bad thing, as long as you can prioritize the paid within the 0%. So don't put too much money into the 0% put in something that is about like 20% or 30% of your next four months of income, because then you can safely pay it. And you don't have to pay interest. So those those would be my suggestions and the holiday season of enjoying the holiday season. But then remaining relatively debt free come January 2021.

Dan Jovevski  43:48

Amazing Saurav. That was that was a fascinating insight into some really practical ways on how you can really avoid a lot of these debt traps come the Christmas season and take advantage of some of the cognitive traps that we fall into. When we go out there and we shop and we overspend. One One great concept that I think the audience will enjoy serve is that, you know debt at its real essence is really borrowing from your future. Right? You're conceiving today. And at Sunday, the bill is going to arrive, and you're going to have to pay for that. So as you think about tapping into you know that extra piece of Lake ham during Christmas, or buying those two or three extra pairs of sneakers, just ask yourself, do I really need these purchases today? How am I going to feel about them after I purchase them? And is it worthwhile consuming my future today, and I think surevys touched on some really great concepts that can really help us avoid some of those traps. Saurav, with that being said, we wanted to thank you so much for coming on to today's program. Is any final thoughts that you can leave our listeners with?

Saurav Dutta  44:59

Sure Dan, Thanks. Thanks Blaize. This was wonderful experience. And I really enjoyed talking to you about this. And as I said earlier, this is a very important topic and, and people need to be aware of it so that they don't fall into this kind of situation and cause themselves more hardship than required. And one final thought, as he said, done, and I don't know how many of you guys and I think they started showing this show called The Big Bang Theory in Australia. Yeah, so given the COVID situation, and I know do know that some of the people might be hurting economically because of past jobs or lost income, or honestly, NWA but in other parts, and I'm coming this holiday season when to purchase gifts and gift giving is normal app causes financial strain to many people. So if that is causing some, some of your listeners some strain, just follow the advice of Sheldon Cooper. Instead of giving out gifts, in terms of consumables, give your loved ones, a voucher of coupons that you will provide them services word of like babysitting, a free physics lesson with you or whatever you're good at or your garden, but provide them with services. Learn from Sheldon Cooper. He's a high IQ person.

Blaize Pengilly  46:34

That's that's amazing advice. I don't think I'll be offering any physics lessons. But very, very good advice. Thank you so much for joining us, Sarah, we really appreciate your spending your time with us and sharing all of your vast knowledge about the common debt traps that people are experiencing. Now, if anyone wants to read more of the articles that you've done, where's the best place to get that information Saurav?

Saurav Dutta  46:58

Blaize, the articles are obviously available for all the conversations Australia website. So those are free is just basically just to put in the Google my name, last name, do you TTA and debt traps or consumer lending, and you'll be able to find those.

Blaize Pengilly  47:17

Perfect. Well, thank you, Saurav, thank you so much for joining us. I really appreciate it.

Saurav Dutta  47:21

Thank you again. Thanks, Dan. And thanks, Blaize, this was great talking to you. I hope we can do it sometime in the future.

Dan Jovevski  47:27

Thanks Saurav.

Blaize Pengilly  47:31

Woww that I have a little bit I'm a little bit snowed under with all the information we just learned from Saurav. What an what an incredibly knowledgeable man. And yes so many insights on on debt. What did you take from that conversation with Saurav, Dan?

Dan Jovevski  47:50

Blaize, I think that the key standouts for me from Saurav's conversation was some of the more practical steps around avoiding a debt and how debt really becomes a real barrier to progressing with future goals. And if you're not careful, particularly nearly 20 years, that can have some really big ramifications in your future. I think serralves worldview and perspective, you can't see him as a sage in the space, a person that sort of multiple different areas around the world and deal with, you know, governments have all sorts of sizes, done a lot of use the skill set to help out in charitable efforts as well, which is incredible. And I think a lesson for us all that the fact that there's four big major ones, allows us to be mindful of those as we approach potentially using debt as a function to get along with their lives. And yeah, I think Saurav is somebody that I think we should talk to again, and really get get deeper in some of these topics, which I think our audience will really love. How about you Blaize?

Blaize Pengilly  48:50

I found it really interesting. Normally, when you think of will normally when I think of debt, I think you know, mortgage, credit card, and now I start thinking buy now pay later as well. But to think about the to hear him go into debt about the fringe kind of ways of getting into debt, and how people get there, whether it be through not necessarily positive means or whether it be you know, someone having a medical health emergency like that's not something that's in my frame of reference. So it's not a reason why I considered why people might end up falling into these really high interest over the high feed debt traps. So yeah, that was that was really insightful and yeah, I'd love to have Sarah back is an I'd love to really learn more about his involvement in the reparations of the Swiss francs to the Holocaust victims because that just sounds like he said once in a lifetime opportunity. What an incredible experience that must have been so let's let's get it back for sure.

Dan Jovevski  49:46

Awesome, Blaize.

Blaize Pengilly  49:53

Today, we are continuing our journey on the budget breakdown train This week, we're going to take a look at the 60% solution. So this is our second last week on the budget breakdown train. We're going to wrap up this series next week with the Barefoot investor budget, which was coined as the gateway drug into personal finance when we had a chat with Captain Fi. But that's next week. Let's talk 60% solution. Dan, could you have a guess at what the 60% solution is?

Dan Jovevski  50:26

I've got no idea about what the 60% solution may be Blaize, I'd love to learn more, but I'm going to guess that it's only spending 60% of your money, and then save you 40% of it?

Blaize Pengilly  50:41

That's a good guess I thought you were gonna get something along the lines of the required potency needed in antibacterial or the disinfectant. What's to be Corona safe, but I'll tell you how it works. Now, the concept, it's similar to the budgets that we've explored in the past. But this method uses percentages to break down your income into various spending categories. So the history of the budget is the solution, I should say, is that it was it was coined by the former editor in chief of msn money, Richard Jenkins. And the way that it works is that you split your cash into percentages, 60% of your cash goes to essential and fixed expenses. And then the remaining 40%, goes straight to booze. Now taking the remaining 40% goes into is split into four even chunks. One of those chunks is retirement savings. One is long term savings. And the third is short term savings. And then my favorite category of all, obviously, is fun money. Technically, when Richard Jenkins, came up with this solution, it was designed to be used with your gross income or your total income before tax. But if you're starting out, you can make it simple by applying the rules to your income after tax. So for an example, let's use let's say that your weekly wage after tax is a grant. Then using this method 60%, which would be $600. That would go to your fixed or committed as expenses. So that's rent or food, bills, transport, pet food, Wi Fi, your gym membership, your tennis lessons, whatever it is that you've committed to spending, that's the pool of money that it will come out from $100, it will be dedicated to your retirement savings. So your superannuation if you're in Australia, which is usually done automatically for you if you're employed unless you're self employed. The third category is your short term savings. So this might be you might be saving up for a weekend away. Or you might be buying a new phone or appliances or building up your emergency fund. Long term savings ease would be $100. So that these last four categories, all $100 each at the 10% rate that the 60% solution offers. So long term savings, we're talking property debt reduction, a house deposit investments, and the bigger long term goals like that. And of course, as I said before, my favorite category is fun money. So that's, you know, dining out it's milkshakes, it's close to Spotify subscription, anything that you deem fun. Now, using this method over the year, you could be putting away $5,200 into your long term savings and the same in manage your short term savings, which is not not a small amount, like that's nothing to laugh at. So then, with that in mind, the information, what do you think the pros are of this budget?

Dan Jovevski  53:43

Blaize sounds great. I think it sounds really simple to do. Because it goes and breaks down into percentages. And it's quite easy to divvy up for those who earn a regular income to use percentages. So that can be easy enough to put your money into those different categories. There's no need to track your spending, which for some people can be confusing and time consuming, with things like spreadsheets. And I think it's probably got more flexibility than the 50 2030 rule as well. So there'd be some of the pros, I think.

Blaize Pengilly  54:17

Yeah, well, it's interesting, you bring up the 50 2030 rule, because that is the first budget that we looked at in his breakdown series. And yeah, I think having more categories really means that you can break it down even further. And going back to your point about not tracking your spending. I feel like this I feel like checking spending can be a bit of a contentious issue maybe because a lot of a lot of the finance gurus or even like the debt free community influences like even say even Captain fly when he joined us on the podcast and we asked him for a tip on someone that's starting out on their financial independence journey. His number one tip was track your spending and obviously That's a really beneficial way to to monitor where your money is going. However, for some people, it's just not just doesn't sit right with them like for myself, I do try to track my spending, but I find it really difficult to do. So having a budget like this where you're not having to really track each amount, but just taking from your different buckets or your different pools of cash. I think that's definitely a pro for the for the 60% solution. Dan, what would you think cons are for this solution?

Dan Jovevski  55:32

Blaize, it might be difficult to manage if you have a low income, and the 60% doesn't cover the living expenses. So you've got to really figure out what's the most minimum costs that you've got, and could that actually fit nicely into one of those percentages, maybe can maybe can, that would be a con. I mean, it's quite similar to the 50 2030 budget. So if you have a large income, could be allocating more than necessary to say the fund budget, which perhaps might not be ideal if you're maybe looking to save and hit other goals and targets. So it doesn't lock you in into say, a fixed set of percentages that may not be practical in real life. So that's some of the cons, I think, as part of this, this budget as well. And I think to your point earlier around, tracking your spending, I think there's also been an explosion of different ways that you can track your spending and make it a lot easier. So for a lot of people, but they are tracking your spending is never become an easier proposition for a lot of people looking into apps. Also, most banking applications have a breakdown of where your money is going potentially. And I think the problem is probably not about the tracking bonds probably more about the relevancy of actually checking it on a regular basis or checking on a regular basis. This is probably the core core sort of issue there. And I don't know how much the simpson budget does in terms of, you know, helping you achieve that. So yeah, I think it could be a little complicated for some some people.

Blaize Pengilly  57:02

Interesting. How do you think it compares, when it's when it's stacked up? Well, next to the 50/20/30 method that we discussed in the first budget breakdown? Do you think it's better or worse? How do you think it stacks out?

Dan Jovevski  57:16

I don't like it, Blaize.

Blaize Pengilly  57:19

You don't like it?

Dan Jovevski  57:20

I don't! And the reason why I don't like it is because I think what may work for some people. But the reason why I personally don't like it is because I think it's actually a little too prescriptive about where you should be putting your money, and they may not be actually aligned to your long term goals. So for example, to your point earlier, around, you know, short term savings versus long term savings. Why? Why should it be an approach where you put, say, 10% of your income into that that actually may not be aligned to maybe some of your short term or medium term goals. So I'm always a little wary of budgets that end up describing something that you should be doing, which may not be totally worth your situation. On the other hand, if I was looking for a really positive angle, what it does is it makes it really easy about where you should be putting your money in for those people who really want a library approach to any budgeting, this could be a great way to actually become disciplined in in sending your money to the right places. And you know what, it may just work for you.

Blaize Pengilly  58:23

Yeah, interesting. I think, for me, the main takeaway of the 60% solution and the 50 2030 method, and the cash only method and the the envelope method, all of the budgets we've looked at so far, with the exception of the Zero Based budget, which I know you're a fan of, but I personally, it's a way to involve Vegemite detail for me, all of them, the main, the most important part is that it takes it makes you look at your spending, and then go Okay, allocate, allocate, allocate, you don't just have this random big bucket of income sitting there where you can spend it willy nilly however you like. But really, even if it's by percentage, or directly allocating an amount, you really paying attention to where your money is going. And I think that's the most important, most important part of this. But yeah, I would agree with you in that the 60% solution, I think it would definitely work for some people. And I can obviously see how some people use it. But I would agree in that it may not align to your goals. So 10% long term savings and 10% short term savings is a is a fair savings rate. But if you are on the path to financial independence, or if you file obviously, that's not going to work for you because you'll need a higher savings rate. So yeah, that's my main takeaways on the 60% solution. Dan, do you have any final thoughts you'd like to share with us?

Dan Jovevski  59:46

My final thoughts are Blaize is that a budget is better than a budget thinking big money is way better than not thinking about your money and allowing your spending to get out of control. So if you're a person that has Nelson's the popular And seen all the budgets that we've talked about, see if one is right for you and give it a go, and if it does work and if it does suit your lifestyle, but that's absolutely the Mighty 10 of the budget. So I think that would be my summary, Blaize.

Blaize Pengilly  1:00:19

Thank you for tuning in to another episode of We talk Cents.

Dan Jovevski  1:00:22

If you'd like the show, please like and subscribe wherever you find your podcasts and we'll catch you next time.

Blaize Pengilly  1:00:27

We'll be back next week for more money chat.

Dan Jovevski  1:00:30

See you guys.

Blaize Pengilly  1:00:30

See you later.

08. We Talk Cents Episode 8

Mon, 12/14 9:41PM • 1:00:33

SUMMARY KEYWORDS

people, debt, money, spending, pay, budget, traps, consumer, payday loans, buy, dan, income, lenders, long term savings, bad, credit card, personal finance, cash, spend, reasons

SPEAKERS

Dan Jovevski, Saurav Dutta, Blaize Pengilly

Blaize Pengilly  00:09

Personal finance, budgeting, cash flow and investing don't have to be scary words. The We Talk Cents podcast is here to help you learn more about money and take control of your personal finances. The We Talk Cents podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor.

Dan Jovevski  00:45

For more information, please check out wemoney.com.au

Blaize Pengilly  00:50

Good day and welcome to another installment of We Talk Cents. You're joined by me Blaize

Dan Jovevski  00:56

and me Dan.

Blaize Pengilly  00:57

Dan being the finance expert and me your resident spendaholic. On today's episode, we meet Saurav Dutta. He is the head of accounting at Curtin University. So he shares the four most common ways that people find themselves falling into debt. And we also take a look at the 60% solution provisioning. But before we get into that, there was some interesting news that came out last week about buy now pay later. Dan, what was the news?

Dan Jovevski  01:26

Blaize, the the strike securities investment commission or AASIC I have written a report detailing their findings on the state of affairs when it comes to the Barnett power sector. Now, they did find a similar report about two years ago and listed that back in 2018, that some of the issues with the sector that they will keep an eye on, where How often do people get into really bad situations when it came into using bio power products. Now, let's also remind listeners raw some, and plenty of good things about buying a pilot. But some of the interesting and probably what you would call disturbing trends that are emerging is that since 2002, where there was one in six people, they got themselves into financial difficulty when accessing financial products, that astounding increase to one in five Australians. And wise, if you look at the numbers a little more deeper, you'll see that it disproportionately impacts for about 49% of the respondents were aged between 18 to 29 years old. So that's half of the people that fall themselves into those traps. And it's probably easy to see the brain is probably taking over and saying Of course it makes sense. All those people going out there may always retail purchases and not really knowing the impacts that can actually have on their financial pictures. I think it's a pretty big report. This certainly Nick's view from the government. And the government, if we're really honest, is sort of seen by their palette or as one of Australia's greatest exports, it's gone to the US it's gone to the UK. But I think some of the emerging trends that we'll need to keep an eye on is what are the protections do a lot of young Aussies have, in terms of getting themselves into bad spots particularly buy now pay later? What was your thoughs, Blaize?

Blaize Pengilly  03:19

Well, I find it the the stats one in five doesn't actually sound that kind of bad to me. But I guess when you break it down, like that's 20% of the people using these services. And to think back to our first episode, where we looked at how Millennials are moving away from credit cards, and moving towards using services they buy now pay later, that seems pretty positive, because like we discussed in that episode, if you pay on time, you're there's no charge, there's no fee to you. So you're not paying any interest, however, to see that over in one year's time, the number of people missing repayments and having to cover cough up fees going from one to six to one and five. I think it's concerning. And moving forward. It will be interesting seeing where we are at this point next year to see if that trend continues. And then if the government has any, I don't know maybe if the government steps in or if there's any more regulation or anything put in place to prevent this from happening. So yeah, it'll be it'll be interesting to see how it progresses. But then while we're on the topic of debt, shall we should we continue and and bring in serve our guest today to talk about the four most common debt traps?

Dan Jovevski  04:37

Absolutely, Blaize. Let's do it.

Blaize Pengilly  04:39

All right. Let's talk about debt baby. Dan, what do you think is the easiest or most common way for someone to fall into debt?

Dan Jovevski  04:52

Blaize I finally share a personal experience that I've had. When I was about 19 years old. I jumped online one day I was about to go on a holiday, and I ended up applying for credit card. And to my surprise, I was approved. And this is going back, say 10 or so years ago, I didn't have to provide any information. And all of a sudden, I had this fancy piece of plastic that arrived in one nail. Now what happened afterwards also for the next two to three years was a journey of trying to manage repayments of constantly putting things on that credit card, and, you know, almost got into a situation where it became unmanageable. So I think for a lot of people, the earliest forms of credit they get into, particularly in their late teens and early 20s is a way that you we can fall into debt easily. But Blaize I have a feeling that we've we've got somebody that can maybe shed a little light on this space, and really help us understand how we might be able to avoid some of these debt traps.

Blaize Pengilly  05:54

Well, Dan, your feelings are correct, because today's guest has joined us to share the most common ways that people fall into debt. Originally hailing from New York City in the USA, our next guest now heads up the School of accounting at Curtin University in Western Australia. Back in the US, he influenced public policy in his role as academic fellow in the Office of Chief Accountant at the Securities and Exchange Commission. If that wasn't impressive enough, he's also been engaged by the New York State Attorney General's Office investigating billing practices, and was involved with the reparations of more than 400 million Swiss francs, from the Swiss banks to the Holocaust victims. He's authored a book and published more than 40 academic papers. With over 25 years of experience under his belt, he joins us now via zoom to share some of his vast knowledge. So wrap that up. Welcome to the show.

Saurav Dutta  06:45

Well, thank you, Blaize. Thanks, Dan. Thanks for having me on your show.

Blaize Pengilly  06:49

Sarauv, that is quite an impressive resume, you've accomplished so much in your career. Is there anything else that we've missed?

Saurav Dutta  06:58

Haha! Blaize was very generous with her remarks. But I've been lucky in the sense that I've gotten some opportunities throughout my career to make some impact and and in those, especially with the Holocaust victim fund, that was a that was a once in a lifetime experience. I was lucky to be part of that.

Blaize Pengilly  07:23

That's pretty remarkable. Now, sir, let's get into it. How do people get into debt? How easy is it to get into debt?

Saurav Dutta  07:30

Well, fundamentally, what happens is, people get into debt when they spend more than their very simple concept. If you're if you keep your spending to the level of your earnings, you'll never get into debt. But people generally try to spend more than they earn. And that's when you get into the debt. Now, is it always bad to spend more than what you're not necessarily there is an academy part in economics, which talks about rational expectations. What that means is people spend based not based upon their current earnings, but based upon what they believe that future earnings are going to be. Because as typically, people would enjoy a lot more when they're younger than then then when they're older. Young people have more utility from luxuries than older people do. However, as you age, you make more money. Most people as the is the salaries goes up. Whereas in earlier days in your youth, you get more enjoyment from spending, say for example, travel, people tend to travel when the in the late mid to late 20s. And it's much more fun traveling in that age. Then, instead mid 40s. When you have more obligations, you have kids in school, it's more difficult to travel. However, for most people, you make more money in your mid 40s than in your late 20s. So hence, when you're spending in your 20s and trying to pay off in the 40s it leads to debt in your early your You are the same thing goes with house and car. If you say try to save up enough money to buy our house, people would tend not to buy a house till the late to mid 50s. Whereas you want to live in our house when you have a young family in your 30s or mid 30s. So these are some of the reasons why people get into that that is they spent before they have the income and the savings. So some of the debt is how they because it lets you live the life you are entitled to much earlier because you pay it off later. However, what happens is if somebody is not disciplined, you end up taking more debt than you you'd be able to support causing some level of financial distress

Blaize Pengilly  10:00

All right sounds like good people spending for the money that they have or thinking about, they will earn in the future. Sounds like we're doing a lot of optimistic spending, and not really being grateful for what we have at the moment but spending for the future. Now, what would you say, are the most four common debt traps that are these are finding themselves in.

Saurav Dutta  10:22

Alright, so one of the things actually, if if the debt is manageable, if it is within manageable bounds, then people go through the traditional means of getting that. So that has basically a bank loan, or for a mortgage, or a bank loan for a car purchase, or leasing of the car, or even some low interest credit cards. However, when somebody has exhausted all of those avenues, and the cheap source of money is no longer available to them, then they go for the ones in the fridge. And that's when the debt traps come in. So what kind of the debt trap is primarily the payday loans is one of the major debt trap. Consumer leaves is another major debt trap, where are you don't listen lease from the manufacturer or the retailer because of the bad credit score, but you go to a separate organization to use it. So consumer is about the trap. Sometimes the lenders may want collaterals to give you the debt. And that's called blackmail, security. That usually causes a lot of distress. And the for the debt trap, is what we call is, unfortunately, is when people are in a lot of debt, and they're very vulnerable, and they want to clean up their records. Sometimes they take help of credit managers, which is what normally they should do. However, some of these credit managers are not. Not let's say, Well, I use the word kosher. Does that make sense? They're not necessarily pure, and they're not looking after people, the consumers interest. And they make people go even more deeper into the debt trap.

Dan Jovevski  12:08

Saurav, that absolutely an amazing breakdown of some of the core reasons why people get themselves into debt traps. And one thing that I really would love to know about I'm sure our listeners listeners would like to as well is for the folks that end up getting to the sense of not feeling like they've got any other options. So into a sense of desperation, or maybe going to providers that charge a lot of interest. What are these people thinking about what's going through their mind at the time as they go to apply for these products? And how are they thinking and feeling?

Saurav Dutta  12:39

So that's a good question, Dan. The primary reason why people get into zombie content, there are two factors to it. One is just illiteracy. So most people are some of the people are financially literate in the sense that they do not fully understand they're young enough, or they're youthful, and they don't fully understand the concept of money and the concept of payment. And believe that if they're getting the cash, they should be able to spend it if they expect the the lender to have done the due diligence, and given them the cash. So say for example, then if you ask come to me and say, Oh, can I have $1,000. And if I give you $1,000, you believe you have earned it and you can go and spend it. And if I'm the bank, you believe that I have done my due diligence and have ensured that you'd be able to pay back. However, sometimes, some of the lenders may not be on maybe unscrupulous and has the take advantage of the vulnerable. So that is one of the things that they get you into a bad product. Or if the consumer has not done their homework, they might get themselves into a bad contract. And thereby, and we can talk about it in more detail later. pd laws tend to be one of those bad contracts. But that's one of the reasons. And the second reason is sometimes unexpected things happen. So if you're in New York, we have a saying that the life changes in a New York minute. Got the concept of New York minute is actually much less than a minute. What's going on on the side? You know what New York minutes actually means?

Blaize Pengilly  14:24

I have. Because I watched that amazing movie with the Olsen twins in it code and your community.

Saurav Dutta  14:31

Because out of New York minute is, is actually much, much less than a minute, because it is how long does it take for the light the traffic light to turn from red to green, and the car behind you honk at you because you did not move. That's the neon sign which is actually a fraction of a second. But But going back to our that part. Yes. So the life could possibly change in any minute. Like for example and we'll hopefully We will talk about it later, the COVID pandemic, nobody anticipated this. And COVID pandemic caused a lot of economic stress, people lost jobs. And things did not work out as planned. The global financial crisis in 2008 2009, was another Southern shock into the system, where people's anticipation and their expectations were not met. When certain events such as those happen, then all of a sudden people find themselves in a debt that they cannot pay back. So supposing somebody has a very good job was about 200,000, and they've taken a dad that is manageable, it's about 40,000, and so on, but they lose the job and they have no much assets left. Now they find themselves in a debt trap. And once they have exhausted our good lenders, or reasonable lenders, then they find themselves trying to get easy cash from lots of favorable lenders. Another reason why people get into debt trap is again, the bad things like health reasons. So if somebody falls sick, and you don't have insurance, and you have to get a surgery, what do you do you like, after all, you know, money is not that important as the life of a loved one. And hence, you get into the debt. And if somebody is sick, you're not really thinking about money at that time. And that's when you're most vulnerable. And some of the lenders take advantage of that vulnerability and get you into a bad contract.

Blaize Pengilly  16:34

Saurav, would you say that we need a sort of Robin Hood in this situation, just stop the sort of untrustworthy, or maybe the lenders that don't have the consumers best interests at heart from from leading them into these debt traps?

Saurav Dutta  16:48

Well, that's a kind of a loaded question in the sense. You know, we, after all, live in a free society. I mean, one of the aspects of the free society is that we should have right, make money and pursue that economic interest. You know, as long as it does not break any laws. So when even though I'm calling them unscrupulous lenders, if they're playing within the legal framework, and coming up with the products, then this they have equal rights to make money, it is for the consumers to be educated and not go into these things. So as part of regulation, all that can be done is to make sure that the information is available. But if the if the government are the regulatory bodies is these are good products, these are bad products, then how are businesses going to come out and make profits? So it is the question of how much do you protect your populace, and how much opportunities you provide others. So that's a very delicate balance for government or the regulators to strike. So in Australia, in America, in most open and Western countries, the the place where they draw the line is, well, we'll give you enough opportunities to make the business or make your own product or develop a business model, which might actually take advantage of other people, as long as you fully disclose. Yeah, so in terms of business models, if business makes more money, it is probably because somebody else is either creating a lot of value or somebody else's losing a little bit of money to make excess return, the consumer will be paying a higher price. So while in free societies, we let businesses come up with innovative ideas to make money because that's what prompts innovation. We also want to provide some level of protection to our citizens. And that's where the regulators and governments have to strike a balance. We cannot over regulate and not let the businesses come up with innovative products, because that will storm innovations. And at the same time, we don't want too many businesses to come in and take advantage of our citizens. So in most in Australia, American most Western European countries, the balance of stripe between letting the businesses come up with the model, but at the same time, fully disclose it to the consumer. So it's the concept that is very simply called by the hour. So if you make the binary aware, everyone is an adult, everyone can make their own decisions. If somebody wants to do something that is stupid. We don't regulate against stupidity, right, we cannot regulate. So we let people make stupid decisions, but as long as they have the information necessary just to know that what they are doing might be stupid.

Dan Jovevski  19:59

Saurav. You definitely have a really good point there. And I think we might go a little bit deeper on this topic, because I think it's really fascinating is, what is your thoughts on structural inequality. So for people that may be living, sort of week to week, you know, they don't have as many economic opportunities, as I say, you know, also today sort of podcasts, there may be working job to job, the whole family has grown up in really underprivileged circumstances. And for those folks who may not have had the exposure, or the luxury of, you know, a good education or a good understanding of how to manage your finances. Do you think there's something in built within society that sort of tends people to be constantly sort of poor? Where they can't get ahead? Is there anything in your research that suggests that might be a phenomena worth exploring?

Saurav Dutta  20:50

Well, that's a really good question. That's already societal equity question. One of the things that has been explored, or to be explored even further, is say, even in high schools and all when people have to learn a little bit of physics and chemistry, and so on, which most people, most people that you mentioned about who are working from multiple jobs and have come from disadvantaged backgrounds, will perhaps never use in life. Why should we not include a class on personal finance in the ninth and 10th grade, which will actually benefit most people for the lifelong, much more than learning about the Newton's laws of motion. And our educational system needs to adapt to that and give people life skills early on in the high school, when it is mandatory, and not leave this is skills for the university. Because as we know, only a few privileged people get to go into the for the university education. Whereas in high school, I'm least in Western Australia, since it is mandatory, most people most population is going in there. And these skills ought to be taught much earlier in the high school and much earlier, like a 1415 to the children, and not wait for this to be taught at 2021 these are not that difficult concepts. And then the definitely not as difficult as understanding, say, the Newton's laws of motion or understanding organic chemistry. If you can teach basic calculus in high school, you should be able to teach basic personal finance in high school.

Dan Jovevski  22:37

Absolutely, Saurav. One of the things that we've seen, here at wemoney, in particular service that a lot of people that we've seen right now, who are attracted to understanding their money are often people that end up being saying their late 20s, early 30s, when they've gone through those painful mistakes, of getting into auto debt traps, keeping up with the Joneses, you know, spending beyond this sort of means and don't really recognize the ramifications of this until they reach those critical life events. Like for example, starting a family buying a home and just realizing they come to the party in a relationship, say for example, with a whole bunch of debt. What would be your message to young people right now say if you're, you know, perhaps your your your 20s, or you're approaching your sort of 30s, around some of the more sort of practical measures of recognizing that you might be in a problem when it comes to being in debt? And how do they will be your advice for them to maybe get themselves out of the situation as quick as possible?

Saurav Dutta  23:41

So Dan, to answer your question properly, for a person to be able to get out of the debt, the prerequisite for them to know is that they are really in debt, and they are in unsustainable debt. So let me answer that question. First. How do you know that you are in unsustainable debt that you have too much debt? Because some debt is not bad, but having too much debt is bad. And the primary thing is for people to recognize when they are in too much debt. And there are two measures that usually can identify when somebody has a lot of debt, what is called debt to income ratio, how much do you earn in a year, and how much of that do you have? So having a debt to income ratio of about 20% 25% is helping more than 40% you're getting into the danger zone. The other measure is so in general, with debt to income, we say that your normal debt other than your house, in a mortgage and so on your normal debt should not exceed about one third of your income, including the house debt, your mortgage and your car and so on. The total debt should not exceed More than your three years of anticipated income. So if somebody is making 100,000 right now, and they expect to grow that income 10% a year, so they'll get 110,000 next year and 121,002 years from now, they should not have that more than 30,000. So that's a, that's a pretty good measure. And that to 30,000 should include the mortgage, the house, the car loans, the boatloads of anything else. So that's a pretty good measure. And the second aspect of the debt is usually called the debt to asset ratio. So if you're, if you're buying if you're having debt, to justify assets, or like a house debt is not the same as debt incurred for travel, because in the house, the prices go up, you're still benefiting, how's that no mortgage is probably better than even car loan because a car depreciate whereas normally your house does not. So it is the debt to asset ratio is another good measure. And usually debt to asset ratio around 40 to 50%, is reasonably healthy. And when you're doing the debt to asset ratio, the person should also look at how volatile the value of the asset is. So like, for example, land and houses are not as volatile as say, if your most of your assets are an options on stock market, that tends to be more volatile. So, so all of a sudden, with the global financial crisis of COVID, your asset might drop 40% in a day, and now our debt to asset don't have them. So there are healthy levels of debt. And there are websites and government is which provides details as to what is a healthy debt level. Now, once you have, once a person has recognized that and have unhealthy debt, or unsustainable that they have to come up with a plan of how to reduce it. And usually the plan would entail some level of cutting down expenses, stop doing certain things that you're doing, stop picking up the bill every time you go out with our friends, or so on and stop, cancel some travel plans and so on. So like, for example, you know, even though COVID has disrupted most of the lives, and it has actually caused much disruption and much anxiety and anguish throughout the world, in Western Australia, we have been lucky that we have not been as affected. And we still most of us still have jobs and have income. However, one thing that has been affected is we are not able to travel as much out outside of the UAE. And hence, this might be a some time when people can actually take that budget that had kept for travel, and try to pay off their debt and get into a better financial standing, and take advantage of the situation and and build themselves up for the future.

Blaize Pengilly  28:00

Saurav, I found that really interesting about the healthy debt and what a healthy debt ratio is. But I would love to talk more about the deep fried debt or the unhealthy debt, and the four common debt traps that you mentioned earlier. So you have the payday loan, the consumer lease, the blackmail security, and the credit manager. Now, could you please go into a little bit more detail about each one of these traps? why they're a trap? And how people find themselves in them?

Saurav Dutta  28:30

Sure, let me explain them one by one, for example, payday loans. So the payday loans are very short term loan usually lasting for a week or so somebody needs a sudden infusion of cash. And the would do this, get into a payday loan. One of the reasons why people tend to get into loans and this kind of debt trap. Going back to Dan's question is sometimes and most of these people have some form of addiction, and that is a support that addiction and they can't wait to purchase it. So they can't wait for the salary to come in to purchase. So for an alcoholic or drug addict to saw, they have to support their addiction, and that's where they need that Southern cash office. Those are the bad reasons for it. However, there are there are some reasons that are unexpected reasons and you cannot blame them for it like health emergencies, or the car breaks down and you have to go to work and you have to have the car repair. So those are some of the legitimate reasons for why people need sudden cash at a very short notice. However, when they go to the payday loans, then there are organizations that provided that usually the terms are are not regulated because they don't charge interest in instead they charge fees. So since they don't charge interest or the call, call it don't charge interest. They don't fall out. Under the regulations for banking, but the fees could be exorbitant, which are not necessarily kept into our boat, they don't fall under the same guidelines or same regulations. So for example, with payday loans, they may say, Well, just to get the application, you have to pay $100 application. So for the $1,000 loan, if you have to pay the $100 application fee, that's already a 10% interest, even if you're paying it over a year, if you're paying it in a week, that compounds very quickly, interest rates exceeding 400% annualised. So it is, even though it is not called interest, they call it an application fee, but it is significant amount of the loan has is a quasi interest. And because of these lack of disclosures, some of these companies have had to pay fines exceeding about close to about $20 million $15 million to settle these losses. So that's one of the bad ones, the payday loans. And that's not just in Australia, that that kind of payday loans are also regulated in the US, and it's a big problem within the US. The other one is the consumer lease. So when you have to buy something, say like a television or a washing machine, you could have up to three options. One is you can buy it outright. with cash, you can buy it on your credit card and pay off the credit card, or you can lease it from the retailer. But to do any of these things, you need to have the post consumer needs to have reasonable consumer records and credit records for credit card companies to do it. However, when they have exhausted all of those possible outlets of getting cash, they may go into consumer leases, which is the rent by month and so on, where the price of rental is actually much higher than if you are owning the equipment. And in general, you peed over the over four or five years, and then you return it. But and you end up paying or the consumers end up paying interest rates of about 80% 90% annualized because the payments are small, but you're paying it over a much longer period of time. So that's another bad one. The third one is what they call the blackmail security. So blackmail security actually takes a tangent of something that is actually legitimate. If a lender has to give you cash, usually there, they can ask you for the collateral, I can say that's basically the age old practice of creditors, then those are the pawn shops, you want some money, give me your gold ring or a gold necklace. And when you get your money back, or you really pay me back, I'll give you back your collateral. So I keep it, I would usually keep a collateral. That is what more than what you're more. So now what they have done, the played up on that old very old concept going back 2020 500 years. And they said, Well, I don't necessarily need your gold necklace, I need something that you value more, even though it not may not have that much value. So let's say for example, an individual needs the car to get to work. While the car may not be of that much value, I give you a lot of money but hold the car as collateral. And that way I know that the borrower is going to prioritize paying my loan because if they do not pay my make my payments, they will lose the privilege of using the car because I'll take it from. And the same goes for a tractor for a farmer. If the farmer doesn't have the tractor, they cannot earn their living. So that's basically what is called a blackmail security. So I hold that just as a blackmail, to make sure you pre made that up in my cache. So that's the one and then the fourth one, which is a really bad one is there are unscrupulous provider that act as though their credit manager and they're trying to help you out of your debt. But they put you in situations where they alter your debt and get you into new companies, but they're not being forthright. And they get you into worse situation than you are previously by charging them exorbitant fees, consulting fees, and other kind of form of payments. And you are in worse position than you were before. So the government in that situation has other providers that are not for profit providers and so that can provide valid financial advice. So those are those are the primary four debt traps.

Blaize Pengilly  34:51

Saurav, when you want to choose how do you do you have any advice for choosing a trustworthy credit manager? I can imagine it must be awful feeling like you You find yourself in a lot of debt, you're reaching out for help. And then you could find yourself being swindled or stuck in more debt even again, how do you choose someone that's trustworthy?

Saurav Dutta  35:09

So, so one of the things is to go into the local government and look for not for profit agencies that do it. The government websites usually have lists List of people, most banks would have list of providers that are that provide credit manager services. So even like regular banks, the big four and legitimate banks have to provide that service on the list of providers. So going through those legitimate sources are good. Usually, they're not for profit organizations that do it. And one of the one of the red flags usually is if the credit manager charges, substantial amount of fees to provide advice, that should be a red flag, why are you going with them, go with somebody who would charge you no money, because these are usually organizations that are doing it for not for profit, and they get the funding from the government,

Blaize Pengilly  36:08

Awesome!

Dan Jovevski  36:09

Saurav, that was a phenomenal insight into the four common reasons why people find themselves into debt traps. And I think you've done a lot to educate our audience on how they might be able to overcome or even recognize the phases where they get themselves into a lot of debt. As we approach the holiday season, we're recording this podcast in November. What's your thoughts on people taking out loans during the Christmas period, because I think a lot of our listeners, they probably can already see what's going to happen. Christmas is a silly time where a lot of spinning occurs, people will probably take out a lot of loans for this period. But more importantly, the amount of ads that we see on TV and radio for like 0% balance transfers in January, kind of almost perpetuates the the course of the reasons why people may find themselves into this habitual cycle of having excessive credit card debt and personal loan debt. What are what are some of the things that you've seen in your career over this period of time? And what are some tips people they can take into the holiday season?

Saurav Dutta  37:11

Sure, thanks. Thanks, Daniel. It's a very timely question and a very valid question as well. Because as we know, when the holidays first run high, impulse control tend to vanish. People splurge a lot. During the holiday season, you always gobble up an extra cookie or take another scoop of ice cream. And the same goes with finances, people spend a little bit more money than they normally do in other months, November December tends to be more spending by consumers. And which is usually a good thing for the retailer's anyway. But for individual consumers who are spending more money, sonically, people can just spend about on average, more or less $1,000 more during November, December than they do in other months. So that's $1,000 more than your essential necessary purchases. And if you don't have that saved up to $1,000 in November, and December is about $2,000. And you're putting it on a credit card, usually you're paying for it over a longer period of time. And even if you say pay the bare minimum, you end up paying on a $2,000 initial purchase, people tend to pay up about 600 $700 in interest over the time, if they're only making the minimum payments. So it does happen that way. Usually, where does the spending happen? In Australia, actually, over the past years, about 50% of the spending happens with food and hospitality. So people go to restaurants more than drink or they go to parties more than hosts more parties. So it is mostly with the food hospitalities. Most all, as the household goods take up about 10 15%. So does the apparel and clothing purchases also spike up during this time? So what are what are the days of kind of making sure you have fun but at the same time? own don't splurge too much that you're in for it for the rest of 2021. Also, ever, ever few suggestions? First and foremost, make a budget. When you're sober, and you're going for this make a budget How much money do you have? How much do you think you will spend? How much are you going to earn in November, December? And what is that that can help me take you know $230 of debt isn't bad, but 2000 $3,000 of debt on December 31st is bad. So make a budget. How much does your spending this and then spread it out over the two three months. So try not to go over that pressure. Hollingworth make a budget tracker spending. It doesn't make sense to make a budget unless you know how much you have already spent. So every end of every week, you know, what you can how much more you can spend. So make a budget right now. And then at the end of every week, figure out well, how much have you spent excess over your necessary things? Not the food, not the, not the range. But what have you spent on splurging around in recreation over this thing. So once you've tracked your spending, that gives you almost a running score of how much more can you spend, or should you hold back or should you not go out to the bar this week and go out the next weekend. So other thing that usually is a good exercise, people buy gifts a lot, and they make purchases, the stores are going to run a lot of sales this year. One of the good experience with shopping is shop solo, don't go in groups and shopping because you grow go in groups in shopping, you tend to buy more, your friend says, Oh, this shirt looks really good on you. And now you buy it regardless of how much it costs. And so just shop solo, it helps a lot if you're shopping solo, because you're more conscious about how much you're spending, and you don't get given to your impulses as much. Another one is that no, like you're putting things on credit cards, to take advantage of a credit card rewards speed for your purchases using credit card rewards, that saves all your cash. So you can still get the thing but you can still get the item in can still buy it. But be careful and use the code copy what was out there for a reason use that this is the time to use them. And finally, the point that Dan mentioned, which is yes, this is also the time when a lot of the credit card offers come in of balance transfers and 0%, and so on. So get smart about those kind of offers. Just don't do it because it looks tempting other time be one of the things to look for when you're looking at it. And always the you know, the devil is always in the details. There is always in small print, just look at what is the deferred interest rate. So when they ask you for the credit card, they have to put it and they'll put it in small print, but look at what is the deferred interest rate. So if they give you a 0% balance transfer, it has a time limit, you have to pay it say by April 30 2021. The thing that as a consumer, you have to be aware what happens if you don't pay it on me one, how much penalties Do you have to pay. And that basically is covered in what they call deferred interest. And if deferred interest is way above your current credit card debt, say your current credit card rate is about 15%. And this new credit card offers you deferred interest rate of 25% it definitely is not worth it, you will not pay it early, which eventually. So 0% interest rate card is not a bad thing, as long as you can prioritize the paid within the 0%. So don't put too much money into the 0% put in something that is about like 20% or 30% of your next four months of income, because then you can safely pay it. And you don't have to pay interest. So those those would be my suggestions and the holiday season of enjoying the holiday season. But then remaining relatively debt free come January 2021.

Dan Jovevski  43:48

Amazing Saurav. That was that was a fascinating insight into some really practical ways on how you can really avoid a lot of these debt traps come the Christmas season and take advantage of some of the cognitive traps that we fall into. When we go out there and we shop and we overspend. One One great concept that I think the audience will enjoy serve is that, you know debt at its real essence is really borrowing from your future. Right? You're conceiving today. And at Sunday, the bill is going to arrive, and you're going to have to pay for that. So as you think about tapping into you know that extra piece of Lake ham during Christmas, or buying those two or three extra pairs of sneakers, just ask yourself, do I really need these purchases today? How am I going to feel about them after I purchase them? And is it worthwhile consuming my future today, and I think surevys touched on some really great concepts that can really help us avoid some of those traps. Saurav, with that being said, we wanted to thank you so much for coming on to today's program. Is any final thoughts that you can leave our listeners with?

Saurav Dutta  44:59

Sure Dan, Thanks. Thanks Blaize. This was wonderful experience. And I really enjoyed talking to you about this. And as I said earlier, this is a very important topic and, and people need to be aware of it so that they don't fall into this kind of situation and cause themselves more hardship than required. And one final thought, as he said, done, and I don't know how many of you guys and I think they started showing this show called The Big Bang Theory in Australia. Yeah, so given the COVID situation, and I know do know that some of the people might be hurting economically because of past jobs or lost income, or honestly, NWA but in other parts, and I'm coming this holiday season when to purchase gifts and gift giving is normal app causes financial strain to many people. So if that is causing some, some of your listeners some strain, just follow the advice of Sheldon Cooper. Instead of giving out gifts, in terms of consumables, give your loved ones, a voucher of coupons that you will provide them services word of like babysitting, a free physics lesson with you or whatever you're good at or your garden, but provide them with services. Learn from Sheldon Cooper. He's a high IQ person.

Blaize Pengilly  46:34

That's that's amazing advice. I don't think I'll be offering any physics lessons. But very, very good advice. Thank you so much for joining us, Sarah, we really appreciate your spending your time with us and sharing all of your vast knowledge about the common debt traps that people are experiencing. Now, if anyone wants to read more of the articles that you've done, where's the best place to get that information Saurav?

Saurav Dutta  46:58

Blaize, the articles are obviously available for all the conversations Australia website. So those are free is just basically just to put in the Google my name, last name, do you TTA and debt traps or consumer lending, and you'll be able to find those.

Blaize Pengilly  47:17

Perfect. Well, thank you, Saurav, thank you so much for joining us. I really appreciate it.

Saurav Dutta  47:21

Thank you again. Thanks, Dan. And thanks, Blaize, this was great talking to you. I hope we can do it sometime in the future.

Dan Jovevski  47:27

Thanks Saurav.

Blaize Pengilly  47:31

Woww that I have a little bit I'm a little bit snowed under with all the information we just learned from Saurav. What an what an incredibly knowledgeable man. And yes so many insights on on debt. What did you take from that conversation with Saurav, Dan?

Dan Jovevski  47:50

Blaize, I think that the key standouts for me from Saurav's conversation was some of the more practical steps around avoiding a debt and how debt really becomes a real barrier to progressing with future goals. And if you're not careful, particularly nearly 20 years, that can have some really big ramifications in your future. I think serralves worldview and perspective, you can't see him as a sage in the space, a person that sort of multiple different areas around the world and deal with, you know, governments have all sorts of sizes, done a lot of use the skill set to help out in charitable efforts as well, which is incredible. And I think a lesson for us all that the fact that there's four big major ones, allows us to be mindful of those as we approach potentially using debt as a function to get along with their lives. And yeah, I think Saurav is somebody that I think we should talk to again, and really get get deeper in some of these topics, which I think our audience will really love. How about you Blaize?

Blaize Pengilly  48:50

I found it really interesting. Normally, when you think of will normally when I think of debt, I think you know, mortgage, credit card, and now I start thinking buy now pay later as well. But to think about the to hear him go into debt about the fringe kind of ways of getting into debt, and how people get there, whether it be through not necessarily positive means or whether it be you know, someone having a medical health emergency like that's not something that's in my frame of reference. So it's not a reason why I considered why people might end up falling into these really high interest over the high feed debt traps. So yeah, that was that was really insightful and yeah, I'd love to have Sarah back is an I'd love to really learn more about his involvement in the reparations of the Swiss francs to the Holocaust victims because that just sounds like he said once in a lifetime opportunity. What an incredible experience that must have been so let's let's get it back for sure.

Dan Jovevski  49:46

Awesome, Blaize.

Blaize Pengilly  49:53

Today, we are continuing our journey on the budget breakdown train This week, we're going to take a look at the 60% solution. So this is our second last week on the budget breakdown train. We're going to wrap up this series next week with the Barefoot investor budget, which was coined as the gateway drug into personal finance when we had a chat with Captain Fi. But that's next week. Let's talk 60% solution. Dan, could you have a guess at what the 60% solution is?

Dan Jovevski  50:26

I've got no idea about what the 60% solution may be Blaize, I'd love to learn more, but I'm going to guess that it's only spending 60% of your money, and then save you 40% of it?

Blaize Pengilly  50:41

That's a good guess I thought you were gonna get something along the lines of the required potency needed in antibacterial or the disinfectant. What's to be Corona safe, but I'll tell you how it works. Now, the concept, it's similar to the budgets that we've explored in the past. But this method uses percentages to break down your income into various spending categories. So the history of the budget is the solution, I should say, is that it was it was coined by the former editor in chief of msn money, Richard Jenkins. And the way that it works is that you split your cash into percentages, 60% of your cash goes to essential and fixed expenses. And then the remaining 40%, goes straight to booze. Now taking the remaining 40% goes into is split into four even chunks. One of those chunks is retirement savings. One is long term savings. And the third is short term savings. And then my favorite category of all, obviously, is fun money. Technically, when Richard Jenkins, came up with this solution, it was designed to be used with your gross income or your total income before tax. But if you're starting out, you can make it simple by applying the rules to your income after tax. So for an example, let's use let's say that your weekly wage after tax is a grant. Then using this method 60%, which would be $600. That would go to your fixed or committed as expenses. So that's rent or food, bills, transport, pet food, Wi Fi, your gym membership, your tennis lessons, whatever it is that you've committed to spending, that's the pool of money that it will come out from $100, it will be dedicated to your retirement savings. So your superannuation if you're in Australia, which is usually done automatically for you if you're employed unless you're self employed. The third category is your short term savings. So this might be you might be saving up for a weekend away. Or you might be buying a new phone or appliances or building up your emergency fund. Long term savings ease would be $100. So that these last four categories, all $100 each at the 10% rate that the 60% solution offers. So long term savings, we're talking property debt reduction, a house deposit investments, and the bigger long term goals like that. And of course, as I said before, my favorite category is fun money. So that's, you know, dining out it's milkshakes, it's close to Spotify subscription, anything that you deem fun. Now, using this method over the year, you could be putting away $5,200 into your long term savings and the same in manage your short term savings, which is not not a small amount, like that's nothing to laugh at. So then, with that in mind, the information, what do you think the pros are of this budget?

Dan Jovevski  53:43

Blaize sounds great. I think it sounds really simple to do. Because it goes and breaks down into percentages. And it's quite easy to divvy up for those who earn a regular income to use percentages. So that can be easy enough to put your money into those different categories. There's no need to track your spending, which for some people can be confusing and time consuming, with things like spreadsheets. And I think it's probably got more flexibility than the 50 2030 rule as well. So there'd be some of the pros, I think.

Blaize Pengilly  54:17

Yeah, well, it's interesting, you bring up the 50 2030 rule, because that is the first budget that we looked at in his breakdown series. And yeah, I think having more categories really means that you can break it down even further. And going back to your point about not tracking your spending. I feel like this I feel like checking spending can be a bit of a contentious issue maybe because a lot of a lot of the finance gurus or even like the debt free community influences like even say even Captain fly when he joined us on the podcast and we asked him for a tip on someone that's starting out on their financial independence journey. His number one tip was track your spending and obviously That's a really beneficial way to to monitor where your money is going. However, for some people, it's just not just doesn't sit right with them like for myself, I do try to track my spending, but I find it really difficult to do. So having a budget like this where you're not having to really track each amount, but just taking from your different buckets or your different pools of cash. I think that's definitely a pro for the for the 60% solution. Dan, what would you think cons are for this solution?

Dan Jovevski  55:32

Blaize, it might be difficult to manage if you have a low income, and the 60% doesn't cover the living expenses. So you've got to really figure out what's the most minimum costs that you've got, and could that actually fit nicely into one of those percentages, maybe can maybe can, that would be a con. I mean, it's quite similar to the 50 2030 budget. So if you have a large income, could be allocating more than necessary to say the fund budget, which perhaps might not be ideal if you're maybe looking to save and hit other goals and targets. So it doesn't lock you in into say, a fixed set of percentages that may not be practical in real life. So that's some of the cons, I think, as part of this, this budget as well. And I think to your point earlier around, tracking your spending, I think there's also been an explosion of different ways that you can track your spending and make it a lot easier. So for a lot of people, but they are tracking your spending is never become an easier proposition for a lot of people looking into apps. Also, most banking applications have a breakdown of where your money is going potentially. And I think the problem is probably not about the tracking bonds probably more about the relevancy of actually checking it on a regular basis or checking on a regular basis. This is probably the core core sort of issue there. And I don't know how much the simpson budget does in terms of, you know, helping you achieve that. So yeah, I think it could be a little complicated for some some people.

Blaize Pengilly  57:02

Interesting. How do you think it compares, when it's when it's stacked up? Well, next to the 50/20/30 method that we discussed in the first budget breakdown? Do you think it's better or worse? How do you think it stacks out?

Dan Jovevski  57:16

I don't like it, Blaize.

Blaize Pengilly  57:19

You don't like it?

Dan Jovevski  57:20

I don't! And the reason why I don't like it is because I think what may work for some people. But the reason why I personally don't like it is because I think it's actually a little too prescriptive about where you should be putting your money, and they may not be actually aligned to your long term goals. So for example, to your point earlier, around, you know, short term savings versus long term savings. Why? Why should it be an approach where you put, say, 10% of your income into that that actually may not be aligned to maybe some of your short term or medium term goals. So I'm always a little wary of budgets that end up describing something that you should be doing, which may not be totally worth your situation. On the other hand, if I was looking for a really positive angle, what it does is it makes it really easy about where you should be putting your money in for those people who really want a library approach to any budgeting, this could be a great way to actually become disciplined in in sending your money to the right places. And you know what, it may just work for you.

Blaize Pengilly  58:23

Yeah, interesting. I think, for me, the main takeaway of the 60% solution and the 50 2030 method, and the cash only method and the the envelope method, all of the budgets we've looked at so far, with the exception of the Zero Based budget, which I know you're a fan of, but I personally, it's a way to involve Vegemite detail for me, all of them, the main, the most important part is that it takes it makes you look at your spending, and then go Okay, allocate, allocate, allocate, you don't just have this random big bucket of income sitting there where you can spend it willy nilly however you like. But really, even if it's by percentage, or directly allocating an amount, you really paying attention to where your money is going. And I think that's the most important, most important part of this. But yeah, I would agree with you in that the 60% solution, I think it would definitely work for some people. And I can obviously see how some people use it. But I would agree in that it may not align to your goals. So 10% long term savings and 10% short term savings is a is a fair savings rate. But if you are on the path to financial independence, or if you file obviously, that's not going to work for you because you'll need a higher savings rate. So yeah, that's my main takeaways on the 60% solution. Dan, do you have any final thoughts you'd like to share with us?

Dan Jovevski  59:46

My final thoughts are Blaize is that a budget is better than a budget thinking big money is way better than not thinking about your money and allowing your spending to get out of control. So if you're a person that has Nelson's the popular And seen all the budgets that we've talked about, see if one is right for you and give it a go, and if it does work and if it does suit your lifestyle, but that's absolutely the Mighty 10 of the budget. So I think that would be my summary, Blaize.

Blaize Pengilly  1:00:19

Thank you for tuning in to another episode of We talk Cents.

Dan Jovevski  1:00:22

If you'd like the show, please like and subscribe wherever you find your podcasts and we'll catch you next time.

Blaize Pengilly  1:00:27

We'll be back next week for more money chat.

Dan Jovevski  1:00:30

See you guys.

Blaize Pengilly  1:00:30

See you later.


Disclaimer:

The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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