Global policy-makers, it turns out, make horrible role models. Financial advisors must ensure their clients ignore their example and approach their own finances like adults.
Sovereign debt worries have been gripping the markets for several months now — most notably, in the beleaguered European countries of Greece, Portugal, Spain and Ireland. Recently, they have been joined, more worryingly, by the U.S. The U.S. government’s finances have risen to the top of the list of global economic worries, as politicians there play chicken over the need to raise the U.S. debt ceiling or risk a catastrophic default.
The reality is that countries that are wracked with debt either have to cut spending or raise revenue (i.e., taxes), or do some combination of both. None of those options is particularly appealing to politicians. And so, instead of dealing with their financial problems head-on, they’ve been playing the game of “extend and pretend” — deferring these unpalatable choices in the hope that, in time, the global economy will recover and their countries can grow their way out of trouble.
Renewed economic growth is a necessary condition for a return to sound financial footing — but it will not, by itself, be sufficient.
In Canada, government finances aren’t in terrible shape; it’s the balance sheets of many households that are larded with debt. And while historically low interest rates are keeping those debt loads from overwhelming most families for now, when rates rise, the burden will get much worse.
On the other side of the ledger, many households have not saved nearly enough. They might be thinking, like global policy-makers, that they can simply defer the hard work of thrift until some time in the future when times are good, and then they’ll be able to repair the gaping hole in their savings. Again, not likely.
This is where financial advisors come in. Their job should be to struggle against this instinct to ignore painful realities and put off tough choices. Telling your clients what they want to hear instead of what they need to hear may make you popular in the short run. But it won’t make your clients successful in the long run.
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