Chronically in Debt? You Don’t Need an Accountant, You Need a Shrink

The psychology behind living today at tomorrow’s expense.

Dreamstime

Omri owes his first encounter with credit cards and their advantages to an old army buddy. He was the one who explained that payments could be made in installments, that the bank will lend money and that nice things could be bought even if one doesn’t have the wherewithal, by raising one’s credit limit.

That was 30 years ago. To this day, Omri spreads out his payments – and he is still in overdraft. He has advanced in life and has a high-ranking, well-remunerated position. He could easily run his life responsibly. But he doesn’t. He doesn’t own a home, has no savings or expensive things, and has a huge overdraft at the bank, on top of which he borrowed more.

Omri finds all this easy to justify. He says life is expensive, especially when you have kids and don’t want to deny them anything – food, clothes, a home in a good neighborhood, afternoon activities. He would rather teach them to fish than put aside enough to leave them an inheritance, he explains. Nor is he worried about his huge overhang at the bank. He lives his life, avoids checking his balance online and only when things start to press does he take out a fresh loan and promise to change.

He’s in good company. The Central Bureau of Statistics says that 54% of Israeli families with bank accounts were in overdraft for at least one month during 2013. Of these, 63% were families with children, 34% said this is their usual condition and 37% reported having non-mortgage loans.

Also, 37% of families with bank accounts reported receiving at least one call from the bank because they’d exceeded their credit limit, and 11% said they had received six or more calls. Six percent of households with bank accounts had their accounts frozen at least once in the last year, and 4% had it frozen for longer than a month.

There are many reasons for the plague: the relatively high cost of living in Israel, the constant erosion in real wages, the consumer culture that sanctifies the good life and brands, and peer pressure on children and parents.

But experts say there’s another reason behind how people treat and manage money. The world is divided into people who never run an overdraft and the ones who will always outspend their means.

“The reasons for chronic overdrafts can be divided into internal and external ones,” says Uriel Lederberg, director of the Paamonim non-profit organization, which is devoted to promoting economic responsibility in family life. “The external causes include the cost of living and easy access to credit and loans.”

The lenders want us to borrow: That’s their business plan, he explains. As for accepting the loans, here the internal causes come into play. “We always want more. Western society is a material society that measures people by their buying ability, by the property they have accrued. People want the best clothes, the most popular brands, the best car. They want to talk about their vacations, the kids’ activities, so we as a society want more money than we have.”

That desire for more drives people to work harder and earn more, says Lederberg. “But not everybody can earn more, so they live beyond their means. So yes, the cost of living is to blame – but it isn’t the only factor. There is also our desire for a quality of life we cannot afford.”

“A chronic overdraft is first of all a matter of behavior and a system of choices,” says Amir Mandel, a psychiatrist and former head of the psychiatric service at the Maccabi health maintenance organization, and today an organizational consultant. In the case of people who earn a decent living but run a chronic overdraft, the weaknesses and barriers underlying the choices need examining, as does how they cope with reality, he says.

So, is running up an overdraft a matter of psychology?

“Man is but the imprint of his native landscape,” says Mandel. “When I was a boy, I grew up in what was the lower-middle class. In today’s terms, we’d have been poor. My parents were Holocaust survivor immigrants yet never ran up an overdraft. They knew how to handle the money they had.”

Maybe it was easier then, and circumstances have changed?

“There are always circumstances, the question is how they’re dealt with. For instance, when somebody’s running late to a meeting, there are circumstances that caused his tardiness, but they only apply to one instance. Being chronically late apparently depends on the behavior under the circumstances. It is true that prices rose and it’s harder, but the choices you make or don’t make and the priorities arising from the difficulty – and that comes down to behavior.”

A misplaced feeling of wealth

People in chronic overdraft let things get away from them, Lederberg adds. “They don’t manage their money, they don’t keep track of spending, they live impulsively. Ask them at the entrance to a mall what they’re planning to buy and they won’t know, but will wind up leaving with a shirt they hadn’t meant to buy. That spontaneity, the ability not to be planned, to shop at the supermarket without knowing whether or not you already have the product at home, makes people reach decisions without planning or control. That’s not about what we need, but what we want.

“The need arises in the store, causing us to buy more, and when we buy more we spend more and need sources of credit. There’s a misperception about credit. I spoke with a family about its bank account. Their printout showed overdraft, overdraft, overdraft and then suddenly a plus. It turned out they’d taken a loan from the bank, wiping out the overdraft, as would happen after salaries came in. In the case of the loan, it didn’t really mean they had the money, but that’s how they felt.”

Rachel Sheinin, lecturer, blogger and CEO of the Models Capital Markets investment house, points to the economic theory that people aspire to stretch consumption throughout their lifetimes. “By nature, the young have less means and more costs than the aged. They need to buy a home and support their children. So the modern world built infrastructure that enables consumption to be flattened by loans: Borrow when you’re young and spread repayment over many years, or return it when you get an income hike.”

So the problem lies in the system?

“Not every loan is problematic. Did it result from choice or planning? If so, that is a healthy situation because it is provides leverage for the future. But if dragged into it, if it’s a chronic pattern – that’s problematic.”

Lederberg, however, brings it back to personal responsibility. “In Israel there isn’t enough awareness of savings. People don’t save enough. They did in the past, which is why some parents can help us buy homes even if they aren’t rich, but today nobody saves. People go on vacation without having money. They pay in installments. I recently met a middle-class family in which one breadwinner had been fired and they were in difficulty because much of their income went on repaying past loans.”

Demonizing economics

Ultimately, it’s about knowledge and ignorance, says Mandel. Some people know how to manage their money and some never learned it, because of barriers regarding anxiety and their status in the world.

“Let’s start with anxiety. Most of the women I know, if they get stuck with the car feel an obstacle to thinking about opening the hood and seeing what’s going on in there, while most men feel comfortable doing that even if they haven’t a clue,” says Mandel.

So economic behavior is gender-related?

“Unfortunately, I have to admit that it is. In the past I was highly frustrated by the fact that despite my knowledge and experience, women didn’t consult with me about their economic condition. Only after some time did I realize they were simply afraid to deal with it.”

“Gender is just part of the problem,” adds Mandel. “A lot of men also suffer from anxiety over this issue. They perceive economics as something abstract, demonic. The core psychological reason is your status as a responsible adult in the world. Nothing represents status, independence and maturity in our relations with the world and with society more than money. If you control your money, you are a mature, responsible adult. If you don’t control your money, then for better or worse, you’re preserving a childish aspect that is saying ‘I am not fully responsible.’ One of the things that frighten people, from the perspective of our development, is responsibility, the understanding that our lives are what we make them.”

Our behavior extends to other areas where urge control is necessary – food, sex, shopping.

“Recent studies show that self-control is like a muscle,” says Dr. Shahar Ayal of the School of Psychology at the Interdisciplinary Center, Herzliya. We flex our self-control to constrain our consumption, but the muscle can get tired. “The more the cost of living climbs and the greater the external pressures, the more likely we are to lose control,” he says.

Also, some people perceive their overdraft as a control mechanism, Ayal says. “For instance, they think their partner will spend less on luxuries so they’d better keep that overdraft.”

Repulsion from aggression may also play a role: in negotiations, in deciding how much to charge for services or demand a discount – that requires aggression, which not everybody has, suggests Mandel.

Ayal qualifies that he does not see living in overdraft as a personality problem, though some characteristics will contribute to it, such as the tendency to procrastinate and over-optimism.

How can these behaviors be changed?

“The ability to recognize a problem and decide to deal with it is a start,” says Sheinin. “Then you have to work on knowledge.”

“Take people who continue to save when they’re in overdraft,” says Mandel. “The interest on the overdraft is bigger than what they’ll get on their savings, so it doesn’t make sense. The combination of knowledge and decision is the start of a solution.”

Also, don’t assume the bank is on your side: It’s on its own side, he adds.

People fail to grasp the economic damage overdraft causes, says Ayal. “6% interest” is an abstract, but translate that into shekels per day and they take fright.

Israel could regulate overdrafts like the United States, requiring a credit-card loan. Doing paperwork at the bank each time you want to spend more could deter many, Ayal suggests.

Paying more in cash might help gain a feel for prices and naturally, there’s nothing like budgeting. And looking reality in the eye. Fondly thinking that Aunt Dora might finance a new car doesn’t mean it’s money in the bag.