FINANCES - Why do we screw up what is so simple?
INTRODUCTION:
Finances are the primary issue that plagues so many people. Why? Finances should be simple, right? If that were true, why are so many people deep in debt, and why are bankruptcies on the rise? Well, to answer both those questions properly, I would have to write a book, and this post addresses a different issue.
By the time this is posted, many will have received their next stimulus check. A stimulus package that will help many people and businesses. However, I do not agree with all parts of the bill. We should not, at the taxpayer expense, be bailing out states for non-related pandemic debt. Why? Because that debt is a direct result of their own fiscal mismanagement, and taxpayer dollars from those who live in different states should not have that burden. I live in Connecticut. When our state was in great debt, the state had to change ii's spending and impose a state income tax to balance the budget. An income tax that was supposed to be temporary, until our budget was balanced. As with all taxes, once they are imposed, they are rarely repealed. However, this post is not about the stimulus package as many have varying opinions about it, and like most things in politics, it is all about politics. It is done and we all have to live with it and the increased debt our nation now faces. Try to understand that bills such as this, are never about separate issues. It's all lumped into one bill so neither side loses its leverage. The sad ending is, it is at the cost of each of us and our children for many years to come.
This post is more related to our personal finances, and for many, due to the pandemic, they are in a shamble. Some partially because they were in a shamble before the pandemic hit. The pandemic only made it worse. On the surface, finances should be simple. If you have money and want to spend it, fine. If you don't, do not spend it. That seems simple, right? Well, not so much. It's a matter of self-control, and many simply do not have it when it comes to spending money. Obtaining credit cards today is much easier than in years past. High credit limits are common. When we give people the ability to spend money they do not have, most will spend it. The standard answer is, "Oh, I can make the payments," until one day something changes. A cut in hours, layoffs, lack of overtime, and then when we least expect it, something happens that requires additional needed spending because it is a necessity. That could be anything. Replacing a car that is not worth repairing, the roof starts to leak, appliances break, etc. All are unforeseen. It could be anything that falls under the definition of a necessity.
You look and the available remaining credit on your credit cards will not cover the NEEDED expense. Your savings account doesn't have enough in it because of all of the monthly payments that had to be made. Remember what you said, "Oh, I can make the payments." However, the more you spend, the higher the monthly payments become until to reach a point where you cannot make the payments. Payments that caused you to be living paycheck to paycheck. Therefore, off to the phone you go. "Can I apply for an increased credit limit? " Or maybe you now have a car loan you did not expect. Well, so much for those payments you thought you could afford. Let's take a look at where the real problem comes from.
WANTS vs. NEEDS
Money is both good and evil. We choose which it will be for us, and it always breaks down into two categories. Wants and needs. The average shopper is an impulse buyer. Meaning, they see it, they like it, they want it, they buy it. They do not think about whether they actually need it. Let me give you an example and I will use myself because it's a true story. As I acquired more things that I kept in the back of my pickup, I started to become concerned about theft. Even though the tailgate had a lock on it, I had a soft Tonneau cover. Which meant that anyone with a knife could cut it and steal my expensive tools. So I bought and installed a locked toolbox in the bed of the truck. Now, you must understand that at best, I rarely go into that box. However, because the softcover does not open fully against the cab, it is a slight inconvenience for me to unlock the box and get at the tools if the need arose. I certainly solved the problem of security, but someone could still cut through the cover. Of course, my insurance company would cover it, but that still left me with the inconvenience to fully open the cover of the toolbox.
This leads us to wants vs. needs. After looking at my options, I found the perfect hardcover to cover the bed of the truck, and it opened fully, which would totally eliminate any inconvenience. Now keep in mind, an inconvenience that at best, I would rarely need to experience. Therefore, did I want it? YES. Did I need it? NO. The cost of the cover was just under one thousand dollars. Here is where the dilemma comes in for most people, and the number one reason people slip into serious debt. Let's say you were to look back over the past year at everything you bought. Sat down, and actually determined whether you bought it because you wanted it, or you needed it. I'll bet you, and the data shows, that approximately 70% of what we buy, we did not need. Knowing that percentage, how would taking 70% off of your debt change your financial situation? Luckily for me, I could afford the thousand dollars, did not have to charge it, and just paid for it. Now I am happy that I eliminated that slight inconvenience I may have once every now and then. Get the point? Plus I sold my original bed cover which made the expense a bit less. When I moved from my large home into something more practical, I had thousands of dollars in tools. Some of which I never even used. Wanting to simplify my life, I decided to sell everything I did not need. The sad part is, I got a small fraction of what I paid for them, and for items that were virtually brand new.
EXPERIENCE:
Experience is the best teacher, and I have plenty of that. You see, like many, 30 years ago I was also stuck in that trap of buying things simply because I liked them or wanted them, even though I did not need them. the tools I mentioned above are a perfect example and part of the reason I had such high debt. I would use the standard excuse many of us use. "I might need it one day, so it would be nice to have it." My father, R.I.P., like many of your own from that generation, had the mindset that if they didn't need it now, they didn't buy it. They bought it when they needed it. Therefore, generally speaking, his generation did not suffer from high credit card debt, and many, to this day that may still be alive, don't even have a credit card. They still pay in cash. Also, it was much harder to get a credit card in those days, and filing for personal bankruptcy was not the norm. Over the years, bankruptcy numbers increased at an alarming rate. Therefore, obtaining a full bankruptcy started to become more difficult because so many were doing it, that the guidelines had to change.
It got to the point where people learned how to play the game. Meaning, many ran up all their credit cards to the max and filed bankruptcy only to find out that when their income was evaluated, the court determined they had to pay it back over a period of time, and their paychecks were attached. Yes, the rules changed. BUMMER! How shocked do you think they were? However, their mindset was, why not, everyone is doing it. Therefore, the system had to buckle down and the guidelines were changed. Now, if the individual has the ability to pay back the debt, they file a different form of bankruptcy that requires the debt to be paid back over time. How did that plan work out for them?
However, back to my story. I had some pretty hefty credit card debt, and no, I did not file for bankruptcy. I was raised and taught that if you make a bill, you pay it. Well, that's what I did. I sat down, figured out a budget, stuck to it, and stopped buying things I DID NOT need and sold the things I did not need and applied it towards that debt. Also, every week in my budget, I put money into my savings. By the time I was done paying everything off, and it did take time, I also had money in my savings. Since that time, thirty or so years ago, I have been and remain totally bill-free with an outstanding credit score of 835 out of 850. Except of course for my home and house expenses.
IN CLOSING:
Let's be clear. I am not saying that people should not buy what they want on a whim. What I am saying is, that people go into serious debt when they overdo that practice. Therefore, it can be tricky to juggle the balance between wants and needs. However, that is a learned behavior, a habit that can be changed. The good news is, no one is rowing in this boat alone. We've all been there and done that, and many are still rowing. Unfortunately, upstream. Therefore, the take-home message of this post is, all hope is not lost. Yes, the pandemic has made times much more difficult for many. However, there are solutions for people in debt. It only requires diligence, commitment, and changing some bad spending habits along with PATIENCE, and you can do it. Our time on this tiny rock in space is short. Everyone should be able to enjoy their life and some debt is fine and absolutely great for a good credit score. The trick is just knowing when to stop and say no. Pay your card off before you add more to it and allow that door of debt to start swinging closer to your behind until it kicks you hard. Also, no matter what, or no matter the amount, save something every week and forget about it. You will be surprised how quickly it adds up. Should something out of the blue come up, you now have the funds to deal with it.
Getting out of debt is not an overnight process. Some will take out an equity loan against their house to relieve themselves of the debt. That is fine because you can write off the interest, and the payments are lower. PROVIDING you do not run up your credit cards again. Sadly, many do. Years ago. there was an individual that hit the lotto twice in two years. Talk about good luck. Well, maybe not so much. After the first hit, he blew through the money, had incredible debt, and had to file for bankruptcy. You may have heard this story years ago on the news. Well, thanks to his good fortune, that individual against all odds, hit it again, and again received millions, One would think someone would learn from their mistakes. Sadly, some do not. That person blew through that money again, ran up high debt, lost everything, and eventually after the waiting period went by, filed for bankruptcy again. A sad but true story. If the person had managed those finances differently, that individual would have been set for life. The moral being, the WANTS vs. NEEDS syndrome is true and factual.
Stay safe and be well. Thank you.
Caesar Rondina
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