Financial Advice We Can All Use

About a week ago I ran into an article that caught my eye. The article talked about seven signs that you are headed toward a financial blind alley. It also advanced a few ideas on how to get out of the bind.

We live in a materialistic world where success is often measured in financial terms or by the number of “toys” we purchase or lease. The pressure to keep up with others encourages going into debt.

The Temptations Are Many

You are led to believe that if you don’t buy a home you might be falling behind your peers. On the surface, there is nothing wrong with buying a house. We all need a place to live so we might as well buy a house. The government encourages us to buy a home by permitting to deduct the mortgage interest and real estate taxes from our gross income, those reducing our tax bill. Lenders encourage us to buy a home by offering access to low interest rates and low down payments.  Lenders expect you to buy umbrella insurance to protect your home (and their asset).

Successful people are notoriously incapable to manage their finances. Often they do not have a budget. They do not pay attention to the interest they pay with their credit cards. They spend more than their cashflow permits, and they forget to set aside a fund for the rainy days. To keep up with their peers, they will buy a second home, a boat, or RV – three notorious cash eaters. 

Seven Signals of Trouble

1.    You have more than 3 credit cards. Why? So that you can spend more, and possibly juggle the monthly minimums.

2.    At least one credit card is maxed out. You have to use another card to make your purchases.

3.    You are not able to pay more than the minimum. As a result, you accumulate exorbitant credit card interest.

4.    You have no idea how much interest you are being charged each month by your credit card companies.

5.    You spend more than your income. This is an issue when it happens month after month with no end in sight.

6.    You do not have a rainy day fund that covers 6-9 months of your living expenses if you are ill or unemployed.

7.    Your mortgage payment exceeds 25% of your income. Many folks are house poor because mortgages are beyond their limits.

When more than one of these signals is at play, the red light should go off in our heads prompting us to leap into action.

Other signals that you might be in serious trouble can be insidious. For example, you and your partner avoid talking about your financial problems, or you have arguments about money, or there is finger pointing as to responsibility for the debacle.

What Can We Do?

The article that I referenced earlier gave a number of suggestions. Here are the key ones:

1.    List all your debts including amount, interest, and minimum payment.

2.    List your income for the month including wages, interest received, dividends, and other cash payments you might be receiving.

3.    Cut ruthlessly. Use money you save to reduce other debts.

4.    Explore ways for you to increase your income. Second job? If partner is not working, should partner get a job?

5.    Adopt the rule that if you are not able to pay for a purchase at the end of the month, you do not buy.

6.    Reduce the number of credit cards to 3.

7.    Write a plan. Focus on debts with the highest interest rate or start from the bottom with the smallest debt and work you way up.

8.    See if you can consolidate your debts. There are reputable companies that can help you do that.

9.    Do the math. If your debts are more than 50%, consider declaring bankruptcy after consulting your CPA and tax attorney.

Early victories can be motivating. Track your progress bi-weekly so that you might spot trends and opportunities. Read Beverly Harzog book The Debt Escape Plan for further ideas.

You can never get enough of what you don’t need because what you don’t need will not satisfy you.

This saying applies to money, luxury, and dessert.

What’s the Payoff?

To start off, peace of mind!

You don’t have to stay up at night wondering how are you going to meet your obligations. Secondly, and possibly, more importantly, improved relationship with your partner and family members.

Remember, you are a failure if you ignore the problem, not for creating it in the first place. We all make mistakes. Let’s correct them and learn from them.