I noticed something interesting when I was managing my money on Friday the 13th(I mean, something was bound to go wrong on that day!). I had budgeted wrong and ended up having to move money back from my savings account into my current account. I always pay myself first (as soon as money comes in, most of it goes into savings), then I pay bills and then I spend what’s left on whatever. It’s just that I didn’t have enough left to make it to my next payday without struggling, so I had to move money back from my savings to my current account. Oops. Now it’s not exactly a crime against humanity to do so, but according to Behavioural Science, this is terrible (or not-so-great) behaviour, especially when it becomes a habit. This clearly indicates an inability to budget correctly, or to be able to live within one’s means, and that is very problematic. However, for me, and for quite a lot of people, this is not a regular occurrence. But it did make me reconsider how I was treating my money. See, what I’m doing here is frontloading my spending: I’m spending money I know I’m going to have soon, rather than restricting my spending to fit the limitations of the money I already have. And that, my dear reader, is definitely NOT ideal. Now you’re probably thinking: But Merle, you did already have that money, it was in your savings account. Sure, it was. But it had a very different purpose: it was supposed to be savings. Even then, it doesn’t seem that big of a deal (until it becomes a habit!). But let’s now replace savings account with credit card account. You see where I’m going right? Rather than spending the savings I already have, I’m going into short-term debt because of my current expenditure, knowing that I will have the money to pay off the debt at a later date. It seems fine in principle, but who says you are going to have this money later? Is that a dead certainty?
It might be fun to know that one of the reasons the credit card was created was to help with issues like this: you might not have the money now, but you will have it later, so let’s just spend it now, rather than wait until you do have the money. Within neoclassical economics the division of your monthly expenditure into smaller, spread out payments rather than big bulk payments is known as consumption smoothing. Consumption smoothing in itself isn’t harmful, it just reduces the amount of big shocks that we would see in a normal spending pattern. An example of a big shock would be that you get paid on the last day of every month, say you have a salary of 2000 pounds, and then on the first day of every month you have a lot of direct debits and automated bill payments set up (rent, electricity, gas, gym, internet, alimony, car, tuition etc.) which ends up costing you about half your salary. This is a massive shock of a 1000 pound expenditure (when added together), whereas the rest of your month is characterized by much smaller expenditures (groceries, dining out, shopping, commuting, etc.). What happens here also is that you only spend once you have the money available to you. You wait with your expenditures until money is in the account. This is most likely what you would do if you didn’t have a credit card. As such, what we often see is that people can only spend their money on frivolities after the bills are paid, rather than the other way round. Which is good. Now with the credit card you don’t have to wait for your actual income to come in. If you want something now you can get it and pay it off later. This is not just a characteristic of the credit card. There are a lot of apps that make use of this principle of frontloading spending as well. Klarna is a great example of this. I hate it. I hate everything it stands for. It teaches you that you don’t need to have the full amount of money now, you only need to have about one third of the money, and the two thirds will be taken care of later. Hmmmm… There are also apps that track your personal finances and calculate your monthly income (or multiple incomes and in goings) for you. Why? Because these apps have a feature which I’d call “advance income.” This allows you to request money from the app. The app will allow you to request up to a certain amount, based on the income it knows you are likely to get. I’m sure the calculation is very fine tuned, and also partially based on how long you have been with the app (or how much data it has on you). However great the algorithm is, the app has effectively become your payday lender. Great.
Now I can understand that sometimes shit just happens. If something breaks down or ends up costing more than expected, it’s going to affect your finances. Fair play. But there is a difference between someone applying consumption smoothing who has a very stable income, and has had this for years, and someone who is a flex-worker and/or part of the gig economy, whose income is widely unreliable. It is the latter that is much more vulnerable to these shenanigans. If you are in the gig economy and have any experience with it, you know that it’s difficult to determine when how much money is coming in. As such, budgeting becomes more difficult as well. If you can’t tell for certain that money is coming in, don’t frontload your spending. Don’t think that “it’s going to be fine.” Because if a client needs more time to pay, or ends up not paying at all, you’re the one who is now stuck with Klarna payments or having to repay the “advance income” to an app which will charge you close to credit card rates for this debt. Because this is a form of debt. This is not you getting your income a bit earlier. This is not YOUR money. This is debt. All I would like you to get out if this article is to be very wary of companies, apps etc. that offer this feature. I was already very skeptical of moving my own money, which I already had in savings, knowing I’ll be paid soon (on the 20th, 24th and 31st) and knowing how much I’ll be paid. Can you imagine how skeptical I am of moving about money, and spending money, I have no idea when it would come in, or IF it would come in? All I’m saying is: make sure the money you are spending is money you can actually count on. Make sure the money is yours. And not just a form of hidden debt.