Why Financial Education Is the Best Debt Prevention

Psychosocial debt counselling has existed in Germany for over 40 years. A look at the causes of over-indebtedness and why financial education is key to prevention.

Psychosocial debt counselling provided by welfare organisations has existed in Germany for more than 40 years. Yet the reasons why people become over-indebted have changed in recent years: options such as “Buy Now, Pay Later” (BNPL) have spread rapidly and have become almost the “standard” today – often without people truly grasping the risks behind them.

When Debt Turns Into Over-Indebtedness

What are the reasons that turn simple debt into over-indebtedness – and lead debtors across Germany to turn to counselling services?

Germany’s federal over-indebtedness statistics have shown the same three leading causes for years:

The three most common causes of over-indebtedness

  • Unemployment
  • Illness
  • Separation / divorce

Whenever unforeseen events occur in life, financial plans and life concepts may no longer hold up – and financial obligations can no longer be met.

Covid as a Wake-Up Call

The Covid-19 pandemic, starting in 2020, showed how quickly one’s own economic situation can collapse or disappear. Short-time work at companies, or self-employment that suddenly could no longer be carried out, pushed even people who had planned carefully into existential threat.

The Core Demand: Financial Education for Everyone

Anyone following the services offered by debt counselling centres in Germany, and the alliances between these centres – for example within the Federal Working Group of Debt Counselling Services (Bundesarbeitsgemeinschaft der Schuldenberatungsstellen) or similar bodies – will repeatedly encounter one demand:

Financial education in schools – financial prevention, training and offerings for children, young people and adults – must be expanded nationwide and made accessible to everyone.

Only those who know what their own budget looks like for the month and the year, and who are aware of

  • how impulse control influences buying behaviour,
  • how advertising drives consumption, and
  • how psychological influence is used in the design of, for example, supermarkets,

can make sustainable and conscious financial decisions geared towards their own financial stability.

Conclusion

More knowledge, more competence about one’s own finances – that would be something to hope for.

The PALADIN project is co-funded by the European Union through the Erasmus+ programme (KA220-ADU). The views and opinions expressed are those of the author(s) only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.