Financial Risks That Don't Pay Off: The Cost Of Reckless Financial Behavior

By Lewis Humphries | August 22, 2013 AAA
Financial Risks That Don't Pay Off: The Cost Of Reckless Financial Behavior

The culture of boom and bust is very much a part of Western civilization, with the U.S. economy particularly vulnerable to periods of sudden growth and sharp decline. This has been the case for generations, even through America's "gilded age" of the nineteenth century, and in the wake of the Great Recession it appears as though the U.S. economy is more vulnerable than ever.

In terms of the most recent recession, however, there are two things that have distinguished this from previous economic declines. First, the pace of recovery has been far slower and less robust than normal, with the second quarter U.S. GDP growth forecast recently cut to just 0.3% by Morgan Stanley. Conversely, citizens seem to be regaining their confidence in the economy at a rapid pace, as consumer confidence soared for three consecutive months from April and June.

Financial Risks that Consumers Continue to Take
Even though consumer confidence diminished slightly at the beginning of July, the figure of 83.9 remained just a shade below the six-year high of 84.5 recorded in May. This suggests that consumers are typically adopting a less risk-averse approach when it comes to spending in the current economic climate, although whether this is a result of robust sentiment or a general apathy towards the perpetual cycle of boom and bust remains unclear.

If consumers are becoming desensitized to the impact of economic decline and harsh austerity measures, there is a danger that any future recovery may be fatally undermined. This is because citizens will continue to take financial risks and spend outside of their means, without fully appreciating the potential consequences for both themselves and the wider economy. So what everyday risks do you take with your money that could have negative future impact?

Committing to Unmanageable Big-Ticket Purchases
The national levels of debt and borrowing are good indicators of consumers' mind set, especially in terms of how responsibly they manage their finances. While cumulative household debt was falling at its fastest rate since the 1950s during the second financial quarter of 2012, this decline is beginning to level off in the majority of major U.S. cities. At the same time, consumer borrowing has begun to rise once again as citizens took on a further $19.6 billion of credit during May.

While this may not necessarily be cause for concern by itself, it is far from ideal when you consider the state of the U.S. labor market. Although the U.S. economy added 175,000 and 195,000 jobs during May and June respectively, further inspection of the former statistic reveals that approximately 55% of these jobs were either temporary assignments or roles that delivered less than a living wage. This type of growth is hardly supportive of increased borrowing, and as a consumer you should refrain from committing to big-ticket purchases without a suitable income or a permanent position of employment.

Failure to Defer Student Loans
We all know that the current generation of graduates is finding it difficult to find well-paid work. A recent survey of more than 2,000 students revealed that 40% considered themselves to be either underemployed or failing in the pursuit of their career goals. This is causing considerable concern regarding student debt in the U.S., which has reached a cumulative total of more than $1 trillion and forced many to carefully consider their repayment options.

Graduates who fail to recognize their circumstances and force a proactive solution are taking a huge risk, however, as an accumulation of missed payments can damage their credit scores and even result in heavier tax burdens. To avoid this, qualified students should consider requesting a deferral of their repayments, which provides those who are out of work or underemployed with a set period of financial relief. This must be done quickly, however, as applicants who are more than 270 days behind on the repayment of their loans are not eligible for the deferral process.

The Failure to Purchase Travel Insurance
While the lack of risk aversion among consumers may force them to make rash spending decisions, it can also encourage them to neglect important purchases in the quest to save money. Take travel insurance, for example, which despite providing genuine financial protection and peace of mind is often an afterthought for U.S travelers. According to a survey conducted by ThePointsGuy.com, only 37/% of Americans appreciate the value of travel insurance, while just 21% purchase it every time they travel abroad.

This is part of a global trend, with one in four British citizens also choosing to travel without insurance during 2012. This represented a rise from 1 in 5 during 2011, and reinforces the idea that consumers throughout the world are becoming increasingly desensitized to financial risk. When you also consider the relatively low cost of travel insurance and the benefits that it delivers, however, this represents a worrying trend that shows no sign of abating.

The Bottom Line
While these financial risks may appear trivial by themselves, they offer an insight into an increasingly apathetic consumer mind-set. More specifically, the modern breed of citizens appears to have become desensitized to the threat of economic boom and bust, with the levels of household borrowing and debt rising despite sluggish and slow-paced growth. If such behavior was to contribute towards another recession, it would be potentially devastating for both the economy and society as a whole.

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