Lockdown Finances
New Bank of England data[1] shows households paid off a record amount of consumer credit in April, with £7.4bn net debt repaid. Of this, £5bn net was paid off from credit cards - more than double the previous record (March).
At the same time, people are saving more than ever. The data also shows household cash deposits increased by a massive £16.2bn – about £580 per household.
A survey by Opinium for AJ Bell found that 70% have saved money during lockdown; with slashed costs of commuting, not going out and reducing household bills cited as the main contributing factors.
There is clearly great inequality between households at this time. Those whose jobs/earnings have been maintained or with fixed incomes can repay debt/save, as their spending is forcibly curtailed, whereas those losing their jobs, facing reduced earnings or having businesses wrecked face the opposite.
Debt and spending
The data is obviously good news for household finances. With soaring levels of consumer credit and the prospect of increased taxes to pay for the estimated £330bn hit to public finances, it’s good that many are taking the opportunity to reduce debt/save.
The key for improving long-term finances will be to maintain some of this enforced discipline into the future.
A record amount of consumer credit had been piled up by February (c. £225bn) – increasing every month for almost 7 years. This is partially explained by broader socio-economic issues (e.g. low wage growth, high housing costs), but the majority will have been accrued as a result of spending decisions.
So, what causes people to spend money they don’t have, to take out debt to fund discretionary spending? There are many behavioural reasons at play, psychologists have suggested a dozen or so. Below I’ve picked out three of – what I believe to be - the most important;
Opportunity cost – people don’t consider the alternatives when spending i.e. how else that money could be used if they didn’t make that purchase. This is particularly relevant to ongoing, habitual spending which can add up to far more than expected over the years.
Present bias – people focus on the immediate and discount the future, favouring instant benefits over long-term interests. Like Homer Simpson declaring “That’s a problem for Future Homer – man, I don’t envy that guy!” before downing a drink of vodka and mayonnaise.
Self-Justification – people convince themselves purchases are sensible and needed, twisting logic to rationalise an emotional want e.g. that new car PCP/lease is a good deal.
The interaction of these three badly effects long-term financial planning - people don’t consider how many additional years they’ll have to work / how much worse their lifestyles in retirement will be in order to pay for their long-haul holidays, latest smartphones etc.
The alternative is to practice mindful spending. Being aware and honest with yourself over how you allocate your resources (time as well as money) and the longer-term impacts it has on your life.
Start with the end in mind
People will have re-evaluated a lot during the lockdown and this may just include how they spend their time and money and what the actual benefits that outlay gives them are. Hopefully some of those with damaging spending habits will not let them immediately resurface as soon as they are able.
Our advice to our clients when helping them allocate their resources is to start with the end in mind. To establish what they want their lives to look like and to plan for that future.
[1] Bank of England ‘Money and Credit - April 2020’ Report
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