A model of over-indebtedness

A research paper in the New Zealand Economics Papers Journal (April-August 2011) focused on the impact that money management and mental accounting has in over-indebtedness. Over the last decade the increase in consumer debt in Western societies has risen dramatically and when you consider the recent financial crisis it is likely to get worse. Exisiting reserach on over-indebtedness has largely focused on the following:
– individual socio-economic, personal, and situational circumstances
– employment conditions
– time preferences.

Money management refers to an ability to organise and pay bills on time and also plan for future expenditure over forthcoming years

Mental accounting refers to consumers’ cognitive monitoring of upcoming expenditure and income. It is said that consumers form mental structures for money coming in and for money going out. It is sometimes refered to as Mental Money Management.

It is difficult to follow rigid money management practices unless these have been internalised or practiced mentally although mental accounting structures will be at least partly informed by a person’s money management practices.

The graph below shows that over-indebtedness will nearly always be intiated or prevented by personal and situational factors such as: social networks; financial literacy; divorce; illness, unemployment etc.

Maintaining financial self-control can take a lot of willpower. Automated money management practices and internalised mental accounting structures and rules are able to keep the will power required to control the propensity to spend

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