Back                            The Impact of Expectation

Up until recently advocating a financial independence process based on spending less than you earn, minimising debt and managing your expectations  has been very tough. No one is interested in a concept like 'enough is enough' during a time of unprecedented prosperity. You also feel pretty foolish warning people about the dangers of debt when even the most irresponsible investment related behaviour not only goes unpunished but seemed to be the 'smart' thing to do. Over the last few years increasing share values and house prices have guaranteed spectacular investment returns irrespective of quality of the investment strategy used.

Lately, however I have been watching the unfolding events in the US, Europe and now Australia with a growing sense of dread rather than vindication. Houses being repossessed, the failure of banks and falling share prices have become daily news. In particular it has been breathtaking to witness the demise of formerly admired business people as they have been cut down by their debt burdens built up over recent years. Until recently the media has concentrated on the woes and follies of Americans but this is changing. In the last couple of weeks I have seen television programs ('Insight' on SBS and 4 Corners on the ABC) looking at the growing problems Australians are facing in meeting their mortgage payments and credit card debt. 

As is often the case with our public broadcasters both shows have taken the usual tact of blaming the whole situation on the 'exploitation' of unsuspecting or naive working families by the banks and other predatory financial institutions. After hearing the earnest pronouncements of the show's presenters, backed up by various serious looking economists, financial analysts and debt counsellors, I am convinced that some of our banks have been very irresponsible in their lending practices. I also agree that their example of the Commonwealth Bank lending large amounts of money to Sudanese refugees who spoke no English and clearly did not understand what was happening has to rate as the most disturbing piece of banking in Australia's history. However, Sudanese refugees aside, the role individuals play in creating their own debt related problems was not addressed or even mentioned. I guess expecting people to take responsibility for their actions doesn't help the programme's ratings. Sure it has been a time of easy money but no one says you have to succumb to temptation.

I don't want to sound like I don't care, I do. You can't watch a family being evicted from their home and having to move into the garage of their neighbours without feeling compassion and having a desire to help.  But at the same time I couldn't help thinking what on earth did these people expect would happen when they loaded themselves up to the hilt with debt. I also wondered why is it that people pursue a lifestyle that is often beyond their means and what role their expectations play in this ultimately self defeating behaviour.  

A lot has been written about the impact of fear and greed on people's behaviour, particularly when it comes to money, but I think there is something else driving or influencing people every time they spend or invest. It may be a western world affectation, but everyone seems to have an expectation that their standard of living is on a never ending upward spiral. This is usually expressed in terms of "I have a right to ...."

Of course there is nothing wrong with having expectations. They help maintain the motivation people need to achieve their goals, but it's worth asking: How do your own expectations arise? and how do you manage them so they remain both realistic and a positive influence?

In Australia we have many expectations that have a significant impact on our money related decisions. I don't pretend to have done any scientific research or analysis on this, but on the basis of personal experience and what you see, hear and read in the media we seem to expect that:

We can invest our money for a great return without any risk;

We are able to buy anything we want irrespective of whether or not we can afford it;

There is almost no limit to the amount of money we can borrow; and

We live in a country where endless prosperity is the rule.

Underlying all these expectations appear to be a couple of others that really scare me:

We can get something for nothing; and

Our actions have no consequences or more particularly I am not responsible for my actions.

None of these expectations are realistic or even sensible and they are guaranteed to eventually put people in untenable positions. I know this may seem an unfair or overly pessimistic view of my fellow Aussies and you may argue that only a few people would have such unrealistic or naive expectations. However recent events demonstrate that you may be wrong. These expectations may not only be more widespread than you thought but that they are held by people who clearly should know better. 

Australians as a whole owe more than ever before and on a per capita basis more than other developed nations. Our use of credit card debt has exploded since the early 1990s and shows no sign of slowing. The result is a sharp increase in the signs of debt related financial stress. Recent research has indicated that up to 50% of households are relying on overtime or a second job to meet their mortgages and that the average credit card balance is now the equivalent of 3 months of disposable income. Clearly our expectations are exceeding our incomes and there is no safety buffer for most of us. What about our leading business people surely they are smarter than that? Well no. 

We have witnessed high profile companies like ABC Learning and Allco Finance lose almost all their value as a consequence of excessive debt. Many of the executives of these companies have had to sell their shares at fire sale prices due to their over use of margin loans. Other shareholders have had their share portfolios seized by banks for the same reasons.  There is no suggestion that these people were poor business owners or that they were led astray by 'evil' banks. They would probably argue that they were the victims of unusual circumstances or bad luck, but were they really? I would argue that what happened was a direct result of inappropriate expectations driving very risky behaviour.

So where do these expectations come from? Have we always had them? The answer to the latter question is no. You only have to talk to your parents or grandparents, read about how people dealt with the Great Depression or look at some statistics to know that we have much higher expectations now than in the past. As an example, the average home in the 1950's was 115 sq metres, now its 221 sq metres while the number of people living in those homes has fallen by a third. Clearly we now build homes that are far in excess of our needs. It appears that asking your children to share a room is now akin to child abuse.

Answering the first question is more problematic and has to take account of the complexities of people and their lives. My opinion is that many of our expectations are created and intensified by the messages we receive over our lifetime. In terms of volume and sheer persistence the majority of the messages we receive come from advertising and these messages are all of a particular type. Advertising appears to have two mutually supportive aims. One is to get you to forget about what you already have and to focus on what you don't. The second involves the suspension of reality by convincing you that there are no luxuries or irrelevancies merely necessities you don't currently possess. The ultimate goal of advertising is demand creation and maintenance. Recent economic history is full of examples of advertising being used to create demand for a new product irrespective of any real need.   

Mobile phones, the Internet and plastic surgery are great examples but my favourite is the car. At the time the car was invented and developed there was no need for it. People managed to get around, trade flourished and the fact that suburbia didn't exist had no negative impact on anyone. While some people were impressed, many could not stand these noisy, smelly and dangerous monstrosities. Fast forward to today and owning a car is seen as a fundamental right. Anyone questioning our ability to travel when we like and where we like regardless of the impact on others and our environment is attacked and ridiculed. Even dedicated 'greenies' are talking more about how to keep a product that kills people, causes environmental damage and helped create urban sprawl going rather than about whether there is a better way to meet our transportation needs.  

The evil child of advertising is the concept of 'lifestyle' which is specifically designed to raise people's expectations and create a sense of entitlement. We have lifestyle television shows and magazines that are full of people with great houses, cars and clothes. We see them living in exotic locations and having a great time with little or no effort on their part. Of course this is all a fantasy but it has an impact. Over time in the face of these messages and influence of friends, family and work colleagues people come to believe these former luxuries are in fact part of life's basics and so they become 'reasonable' expectations.

The problem is that people's income doesn't always keep pace with their expanding lifestyle expectations. So we do overtime, take a second job or live life on the never never. After all why should your income be an impediment to the lifestyle you deserve!

One of the fundamental principles I try to pass on to people is the connection between their expectations and the outcomes they will experience. Unrealistic expectations can result in financial hardship and feelings of failure or resentment. The trick is to manage your expectations so that they work for you and not against you. How you can do this is the subject of the next article: Managing Expectations.