When spending, know difference between wants and needs

I rarely enter banks and I don't trust online banking.

However, I do find myself occasionally waiting outside a bank whilst our financial manager (a.k.a. my wife and partner) takes care of banking business.

While waiting once I watched a younger man withdraw money from an ATM, something I've never used. He withdrew his cash, plucked the receipt, looked at it and then tossed it to the ground.

Littering bothers me so I picked it up after his departure. He'd withdrawn $10 from his account, leaving a balance of $20. The balance struck me for two reasons — $20 is my weekly allowance, and that was all he had in his bank account. Perhaps, I surmised, he might have an account in another bank or perhaps this was his single bank account and he was living “tight to the wire.”

Tossing a bank transaction receipt on the ground was offensive from the littering perspective. However, more to the point was his apparent casual disregard for his personal finances.

I suspect many people approach their personal finances from a “spending ” or “wants” angle rather than from a “defensive” or “needs” angle. Ever-so-convenient electronic devices simplify the process of spending with ease and insufficient concern.

Defensive spending links personal expenditures to essential “need” and not simply to insatiable “want.” “Selling up” is a characteristic of mass marketing, like at a fast-food outlet.

“You'd like a burger, sir — would you also like fries, a drink, apple tart?”

“Great vehicle; for a few more dollars we can add chrome rocket-racing wheel rims at only $700 each.”

At these luring junctures what is to control your personal “wants” relative to your prospective income? Manage that income relative to anticipated needs such as insurance or utilities.

Do you really need the fries or the apple tart or the chrome wheel rims?

Apparently, many people do not manage their incomes well relative to torrential demands placed upon them.

A recent study by Windsor company Hoyes, Michalos and Associates warned of a rising rate of consumer insolvencies due to rising credit card debt. According to the study, “the licensed insolvency trustee showed that average insolvent debtor owes $54,084 in unsecured debt and an additional $10,490 in non-mortgage secured debt (primarily a car loan or lease)."

This is serious debt and serious mismanagement of income. We have one credit card. We have never paid a penny in interest on that card.

Many years ago, we rid ourselves of all other credit cards. I remain constantly amused that our credit card bill informs us that if we pay just the monthly minimum it will only take 173.5 years to pay off our current bill.

A basic problem for many is how well they understand interest rates and compound interest. Across Canada, many people are enduring the consequences of the Bank of Canada's efforts to control inflation by increasing interest rates.

How many people have bought homes, the cost of which far exceed their realistic ability to pay? The loan-to-income (LTI) ratio is a measure of initial affordability — the size of a prospective mortgage to your gross income.

The Bank of Canada's interest rate policy statement on March 6 noted that, “Shelter price inflation remains elevated and is the biggest contributor to inflation.” The bank added that it was still too early to consider lowering the policy interest rate from its current five per cent.

This “quantitative tightening” is tough on those who bought homes at a lower rate to satiate “want” as opposed to “need."

Some of us vividly remember when mortgage interest rates reached 10 per cent and higher in the early 1980s.

Is it probable that many people now experiencing the pinch and demanding government do something about mortgage rates and inflation are homebuyers with higher LTI ratios who are more vulnerable to financial stress?

Perhaps the same people who spent according to their “wants” rather than defending their money?