What’s Really Driving Higher Consumer Debt?

Dale Gillham, Chief Analyst and Head Trainer of Wealth Within

By Dale Gillham |

Let’s face it, we all love a bargain and right now we’re seeing sales and discounted items everywhere, but are we really getting a bargain? What often goes unnoticed when using services, such as buy now, pay later and credit cards, is that there are fees and/or interest charges that add to the cost of the purchase. We know that the discounted price is on the recommended retail price (RRP), so any discount is not really that big when you consider we can buy the same item for less than the RRP if you shop around.

Why financial abstraction is contributing to consumer debt

If we take a deep dive into the sales events like Black Friday and Afterpay Day, we discover that these are designed to entice us to buy items we don’t really need. The thought of getting a bargain pushes us to spend based on a concept known as financial abstraction. Adam Carroll talks about this in his TEDx talk titled ‘When money isn’t real: The $10,000 experiment”, and this week I had the pleasure of interviewing him on the subject.

The premise is that when we use credit cards, tap and go payments or buy now pay later, money doesn’t seem real to us, so we’re predisposed to spending more, as we crave the endorphins we get from buying something new. Unfortunately, this leads to overspending which has very real consequences, as it creates higher consumer debt, financial hardship and bankruptcy.

The concept of financial abstraction is why companies such as Block (who owns Square and Afterpay) and the banks will do very well. While Square did not perform well last year, it has risen strongly in the last couple of months, trading up 38 per cent, so it’s definitely one to watch. In March, Afterpay ran the first of two Afterpay Day sales event with the second scheduled for August. As usual, their goal is to get consumers to spend cash they don’t have on discounted items using Afterpay as the payment vehicle.

While Afterpay is great for retailers, it’s not good for consumers because it’s putting people further into debt. So what can we do? If you’re enticed to look at the Afterpay Day sale next month, make sure you only spend on items you need and, more importantly, make sure you don’t spend more than the cash you have in your bank account, so you can pay off the items quickly and avoid any extra fees.

What were the best and worst performing sectors last week?

The best performing sectors included Financials up 2.68 per cent followed by Energy up 1.16 per cent and Healthcare up 1.14 per cent. The worst performing sectors included Materials down 2.45 per cent followed by Communication Services down 2.30 per cent and Information Technology down 0.53 per cent.

The best performing stocks in the ASX top 100 included Ampol up 7.86 per cent followed by Virgin Money up 6.54 per cent and QBE Insurance up 5.54 per cent. The worst performing stocks included Ansell down 13.68 per cent followed by Northern Star Resources down 12.58 per cent and IGO down 9.49 per cent.

What's next for the Australian stock market?

After a strong rise the prior week, any reasonable person would think the market would have continued to be bullish last week. But instead the All Ordinaries Index was rather flat up just 0.13 per cent with last Wednesday the only real bullish day.

The good news is that the All Ordinaires Index traded up to 7,958 points, which is its highest level since 17 February, although what is more important is where it closed last week. As it closed up just 9 points higher than it opened and, in the lower half of the week’s trading range, neither of these two things point to the market being bullish. Rather, the market is moving cautiously with neither the bulls or the bears being very confident.

Given this, I continue to caution investors considering that we are still in a time where anything can happen, which is why you need to be selective in the stocks you hold or those you intend to buy. If you do decide to buy, make sure you do your research thoroughly and have an exit strategy. While I believe any possible down move will be short term, right now it pays to be conservative rather than aggressive.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.

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