Money Management and Financial Counselling
Mark Phillips is the Treasurer for the Financial and Consumer Rights Council Inc (FCRC), the peak body and professional association for financial counsellors in Victoria and a Financial Counsellor with Jewish Care in Melbourne, Australia.
Sue Ellson interviewed Mark on the topic of money management to understand more about the challenges people face when managing their money. This article is a written summary (not transcript) of the discussion…
1. Most common reasons people end up in financial difficulty – personal reasons versus context?
There are many different reasons for people ending up in financial difficulty. It could be ‘financial abuse’ where a person separates from their partner (or is divorced), and knows nothing about financial management and doesn’t know how to manage their money. It suddenly becomes much more expensive to live or pay rent (only one income instead of two) and they supplement their income with a credit card or personal loan just to pay the bills each week.
Some people get sick and cannot work. It is not always a case of mismanagement.
There are other people who believe that they don’t have enough and they need to have the latest trendy items (phone, car, clothes etc) but all they need is a basic phone or a car that works and appropriate clothing. Depending on their lifestyle, they may end up leasing a very expensive car to ‘match’ their friends or spend a little more than they should on entertainment and going out with friends.
I have met people in their 50’s who have only been able to secure cleaning work because they did not have a financial buffer for when they got sick and ultimately could not make ends meet and had to sell their home and live in a much smaller place.
For some people who have never developed additional skills, they end up being stuck in unskilled work for 20 years or more and can’t leave or improve their situation.
Some have made bad business decisions. Other well educated people have ended up in community accommodation on an aged pension and have two million dollars in debt. Large families with multiple children also need to micro manage their spending.
Overall though, in most cases, it is a mix of both personal issues and the context in which they find themselves.
2. What are the biggest challenges facing people who are new to a city (from the same country and also from a different country)?
For some, it can be extremely difficult to secure a visa or manage a new language. If they have moved from interstate, they do not have family around to supplement their resources or provide them with somewhere to live in an emergency. They don’t have a ‘fallback position.’
Some people seek help but others may be reluctant to ask. If they hear about help being available, they are more likely to use it. However, a lot of people don’t know that help is available. In my role, I often need to explain exactly what they need to do.
In some cultures (Jewish, Islamic), if they lend money to someone else, they cannot charge interest. People have to guarantee that they will pay back the money and there is a certain amount of social pressure to repay any loans which they will often do to the detriment of their own living expenses. However, there are other sources of support that allow people to secure interest free loans to pay off credit cards or other expenses.
3. What are the most effective techniques for getting out of financial difficulty?
As Scott Pape discusses, not having any money in the ‘third bucket.’ Beyond money for emergencies, this bucket is used to grow wealth and have money working for them. The first step is to pay off the highest item first and where possible, secure an interest free payment arrangement. When the first debt is cleared, re-use that allocation and start applying it to the second most important item.
Making an appointment with a financial counsellor is also important (in Australia, this is a free service). A financial counsellor can talk to banks on your behalf, negotiate hardship arrangements, freeze interest charges, help with welfare claims, organise a debt waiver due to disability if the person cannot work again, apply uniform civil procedure rules, keep items that may be subject to a bankruptcy claim to help the person continue working etc.
In Australia, debtors cannot garnishee a pension payment. A financial counsellor may also be able to negotiate a ‘full and final’ settlement figure or enable a debt buyer to purchase a debt and get cents in the dollar back due to hardship or lack of assets within 180 days. This may help avoid bankruptcy.
When people are over the age of 50, they are at high risk of falling into depression and it becomes very important to watch out for a potential suicide to ‘escape’ the situation. There is always a way to find help through a financial counsellor.
Financial difficulties can also cause a huge amount of stress, so much so that people can choose inappropriate ways to alleviate their anxiety. Some turn to gambling hoping for a big win. Just $20 a week is over $1,000 per year. But it rarely stops at $20 a week.
4. What are the best ways to learn about managing your money in a new country?
In Australia, there are particular nuances that make managing money effectively very important. For example, our utilities expenses (electricity, gas, water, internet access etc) are very high and seasonal fluctuations can significantly affect people (a cold winter in a badly designed and uninsulated property). Many people end up spending more than 50% of their take home income on rent. Road tolls and public transport fares can significantly increase transport costs. Having a fuel efficient car is important for long distances (not a large four wheel drive for city traffic).
5. How do you encourage people to maintain their financial competency after they have gone through the financial counselling process?
Setting up a workable budget and explaining the difference between variable and fixed expenses is important. If you have a car registration bill to pay each year, rather than try and find a lump sum once a year, allocate an amount per week and put it aside so that when the bill comes in, the money is ready to pay for it. Creating a sub account for bills can be helpful. This can create a huge change in spending habits and mean that people only spend what they can afford after the bills have been amortised for the year.
This process requires discipline and it may be hard at first to transfer that money to a sub account. Paying off the previous debts and then closing the accounts (particularly credit cards), is also important. Changing a mobile phone plan to a prepaid plan can be more cost effective.
In some cases, a financial counsellor can refer you to other professional services for free or low cost – for example, a marriage counsellor, social worker, community housing, emergency relief, no interest loan scheme, micro finance (for white goods or car repairs), personal counselling, gambling support (for the gambler and for the family members of a gambler).
6. What are the most common psychological blockages that create challenges with a person’s financial management?
Lifestyle and a change in their social status – they can no longer ‘keep up with the Jones’s.’ Some people do not want to learn better ways.
7. Are people in employment generally better or worse off than people in business?
People in business can clear their debt with full and final settlement arrangements or sell the business, but sometimes some business coaching can help turn the situation around. Sometimes they need to look at the skills they need to run the business properly and employ people to do other jobs, but quite often, they can only afford to do all the work themselves. It could also be a tax problem. It is often about helping business owners re-focus and by seeing a financial counsellor, they may be able to create some breathing space. Best if they ask for it as soon as possible. Banks will listen more if a financial counsellor is involved and may be able to assist with a three month moratorium.
8. What mistakes do people make when they are employees?
Overspending. Not just using their regular income but spending on one or more credit cards. There are many inducements and interest free periods offered, but when these offers expire, it can be hard to pay back with interest as well. Some do not investigate salary sacrificing or they have child support or education repayments. If they are in private enterprise, they may be able to request a performance based pay rise – that way they win and the employer wins.
9. What mistakes to people make in business?
Not budgeting, over spending on inappropriate marketing, spending on Facebook marketing or Adwords, spending thousands of dollars on a website ($20,000 plus). Why? In Australia, there is no need for a $20,000 website to get started, a WordPress website can be created for free, without the need to code.
If creditors don’t pay (or the invoicing or follow up is slow), a business can easily go bankrupt. Sometimes, business owners make bad investments. Sometimes they just walk away when they could pull together and move on but they dwell on an issue and become depressed. In other cases, in dispute related issues, the only people who win are the lawyers.
10. What are your three best tips in relation to managing your money and your earning capacity in Australia?
Have a budget and stick to it. Put money aside for recurring debts and things that could close you down if you don’t pay them (for example, rent). Create a budget for entertainment and stick to it. Build up three months of financial reserves. Read the information provided by Scott Pape, The Barefoot Investor.
11. Where can people go for more help?
There are many places, ask for help. The bank can help. Legislation in Australia means that you are entitled to help. You can see a financial counsellor and make a call to the National Debt Helpline on 1800 007 007. Be proactive, help is available. Banks can refer you to other services as well and as mentioned previously, the Money Smart website is really good.
12. What criteria does any additional help need?
Anyone can access the support of a Financial Counsellor in Australia. It is a free service. To have a financial counselling license, a condition is that you do not charge and you provide unbiased advice. The government pays for financial counselling for at risk people and it is also funded by different community or faith based groups. It is also supported by assistance from other charities – like food or telephone vouchers, utility relief grants from $1 to $5,000 and discussions with various ombudsman offices.
Knowledge is the main way to improve your financial management. It has a multiplier effect. Look beyond where you are looking now. Economies of scale and business experience really helps. Not all Financial Counsellors have business experience, so consider business mentoring and support as well as government funded education programs.