Indebtedness and the Interplay of Money Management & Mental Accounting
Fascinating Excerpts (Via Bernadette Kamleitner, Bianca Hornung, and Erich Kirchler)
In order to meaningfully add to our understanding of over‐indebtedness the present research focuses on two interrelated psychological variables that seem particularly susceptible for intervention programs: money management practices and mental accounting. Whereas money management was associated with debt problems in previous research (e.g. Lee, Abdul‐ Rahman, & Kim, 2007; Webley & Nyhus, 2001), mental accounting has not yet received much attention in this context. We argue that money management and mental accounting are strongly related processes that need to mirror each other in order to help prevent or fight overindebtedness in economically difficult situations.
What Is Money Management?
Over‐indebtedness has consistently been found to relate to money management; including financial planning (e.g. Chakravarty & Rhee, 1999; Kilborn, 2005). Money management facilities (e.g. number of bank accounts) and practices (e.g. preferred frequency of paying bills, putting money away for bills on time, use of pre‐commitment methods for payment) have been identified as correlates of debt (e.g., Berthoud & Kempson, 1992; Hayhoe, Leach, & Turner, 1999; Lea, Webley, & Walker, 1995). Compared to non‐debtors, debtors seem to use more but simpler money‐control techniques (e.g. keeping a household book, having a limited amount of money on the person; Webley &Nyhus, 2001), they seem to be more willing to use credit cards (Livingstone & Lunt, 1992), and they manage their financial resources on shorter time horizons (e.g. Lea et al., 1995)‐‐with problem debtors often budgeting by the week (Berthoud & Kempson, 1992). In addition, Lea (1999) assumes that older people and women are less likely to be in debt than other people because they budget more systematically than men and younger people, respectively. However, despite an impressive amount of research, it is still unclear whether bad money management leads to debt, keeps people in debt, or results from debt as a form of learned helplessness (Lea et al., 1995; Webley & Nyhus, 2001). Overall, money management techniques and practices that are frequently used by debtors were described as short‐term, low tech, nonautomated, and flexible. All these characteristics indicate a substantial requirement of willpower.