Definitions
Aspiration: Used in this report to include various self-improvement reasons for which people may save or wish to improve their financial circumstances. These include being financially independent, aspiring to a particular lifestyle based on their preferences and starting a business.
Cohort / cohort effect: A cohort is a group of people born in a defined period of time who share similar experiences, including life events, economic fluctuations and policy settings. The cohort effect is an inter-temporal concept that suggests that outcomes can vary for different cohorts depending on these shared experiences. Furthermore, these shared experiences can be externally influenced. The cohort effect should be distinguished from the age and period effect, however. The age effect captures what we expect to observe as people age (irrespective of when they were born). The period effect captures the impact of an event across the population (irrespective of age or cohort) at a point in time.
Consumer socialisation: The process by which young people develop consumer-related skills, knowledge and attitudes.
Coping: The process of managing taxing circumstances and expending effort to solve problems, or seeking to master, minimise, reduce or tolerate stress or conflict.
Coping strategies: Three main strategies are distinguished for coping with stress:
- appraisal-focused strategies, which involve modification of one’s thinking processes (including denial, rationalising, distancing, altering goals and values or seeing humour in a situation)
- problem-focused strategies, which involve finding out more about the problem, learning new skills to manage it, rearranging one’s life around it and so on
- emotion-focused strategies, which involve techniques such as releasing emotions, distracting oneself, managing hostile feelings, meditating and relaxation.
Debt: Any financial obligation, leveraged against an asset (secured debt) or against future income (unsecured debt). For our purposes, debt includes mortgages, student loans, bank loans, hire purchase, credit cards, store credit, being in arrears and use of fringe lenders. Indebtedness refers to the act or situation of being in debt. Over-indebtedness refers to the act or situation of being in too much debt (also referred to as ‘problem debt’). In practice this can be difficult to measure because debt repayments may be prioritised over other expenditure items (even necessities). ‘Liability’ is the alternative accounting term for debt. Sometimes the term ‘credit’ is distinguished from ‘debt’ to differentiate manageable from unmanageable debt, or indebtedness from over-indebtedness. In this report, credit is only used when referring to a particular type of debt, such as credit card debt, notwithstanding the following usages: credit is what is loaned, debt is what is borrowed; creditor is owed, debtor owes.
Discount rate: The annual interest rate at which an assumed future value is reduced to produce the required present value. A present-oriented agent discounts the future heavily and so has a high discount rate, in contrast to a future-oriented agent who has a lower discount rate.
Economic Locus of Control (E-LOC): The locus of control concept can be applied to economic behaviour. In 1986, Furnham derived a scale to measure Economic Locus of Control (E-LOC), which is more specific than general locus of control measures. It has been used successfully to differentiate between unmanageably indebted individuals and control groups. The process of becoming over-indebted may involve inter-temporal choice decisions such as the use of consumer credit, and E-LOC was found to have greater validity in differentiating participants with high and low discount rates for financial outcomes. The findings were extrapolated to personal loss, business gain and business loss conditions.
Fringe lenders: These lenders are known by several terms, including ‘loan sharks’, ‘money lenders’, ‘pay day lenders’, ‘cash loan companies’ and ‘marginal lenders’. They tend to provide loans at short notice at high rates.
Heuristics: Informal methods for solving problems.
Hyperbolic consumption: According to this theory ‘hyperbolic’ consumers are like their ‘exponential’ counterparts in that they prefer instant gratification over achieving long-run goals (in other words, they have high discount rates or prefer consumption in the short term). Unlike their exponential counterparts, however, hyperbolic consumers also have time-inconsistent preferences – that is, their preferences change depending on whether they are asked what trade-off they would make now or in the future.
Indebtedness: The act or situation of being in debt.
Locus of control: Locus of control is a personality variable related to how much people believe their lives are under their own control. Those who are said to possess internal locus of control believe they determine what happens to them and that they have the ability or power to change or influence the course of events. Others, said to have external locus of control, feel that the cause and control of events in their lives lie outside their abilities and attribute what happens to them to the external environment. People with external locus of control feel they have little control over how their life evolves and believe that life experiences happen from the ‘outside-in’. They tend to take less responsibility for their actions than those with internal locus of control, and place responsibility on some known or unknown force out of their control, such as chance, fate, powerful others, the government or God. Those with internal locus of control tend to be more self-reliant, independent and confident in themselves and their abilities. They show more initiative and make more effort in controlling the world around them and tend to control their own impulses or urges better than people with an external locus of control. Locus of control therefore includes but is not limited to the concept of ‘self-control’.
Non-status lenders: Operators who specialise in lending money to individuals with a poor credit rating. Non-status lenders typically charge far higher interest rates than mainstream lenders.
Over-indebtedness (or) problem debt: The act or situation of being in too much debt. In practice this can be difficult to measure because debt repayments may be prioritised over other expenditure items (even necessities).
Reverse mortgage: Also called ‘decumulation’ or ‘home equity release’. A special type of loan allowing the equity in a home to be converted into cash. The money obtained through a reverse mortgage is usually used to provide older people with financial security in their retirement years and may enable them to stay in their home longer than would have been possible otherwise.
Saving/savings: The act of putting money aside. Saving (singular) is a flow-concept and should be distinguished from savings (plural), which is effectively another term for wealth.
Social comparison theory: Social comparison theory includes processes (usually discussed in psychology literature) such as the desire to affiliate with others, the desire for information about others and explicit self-evaluation against others.
SoFIE: SoFIE (the Survey of Family, Income and Employment) is a longitudinal survey that runs for eight years, visiting respondents yearly to build a picture of how their circumstances are changing. The survey is now in its sixth wave (interview cycle), having commenced in 2002/03. Dependent children are defined as children who are under 15 years of age, or under 18 years of age and not employed more than 30 hours a week.
Status attainment theory: In the educational context, status attainment assumes that the social status of parents affects the educational level achieved by children, which in turn affects occupational level and social status. Thus, level of schooling would affect (moderate) the degree of intergenerational transmission of social status.
Summary Instalment Order (SIO): A consumer debt repayment plan administered by a New Zealand court as a possible alternative to bankruptcy. The SIO allows the debtor to repay their debts in regular instalments without the threat of further legal action while the order is in force.