Personal finance is quite a jungle. Everywhere we look, there are pitfalls, unexpected emergencies, interesting opportunities, and predators that, if given the chance, will eat you (and your money) alive. The important thing to remember about personal finance is that it’s exactly that — personal. Two people aren’t going to get along with the same advice, and the situations that people find themselves in aren’t always ideal. Personally, I’ve seen the worst of things happen. Losing a job, defaulting on credit cards and student loans, resorting to payday loans and getting caught in their trap are all things I both grew up with and saw myself on the path to before I worked my way out of the mess. At one point, I was in a situation with a car loan for 23% because it was the only thing I could get credit on. All of this led to quite a sobering epiphany for me: the more you try to hide from your money problems instead of confronting them, the worse they will get.
This blog is brand new, but the ability to talk about finances in a rational manner is what will make everybody involved better off. The fact is, sometimes NOT borrowing money is worse for a person than borrowing too much. With a background in economics, I want to help people understand where they are going wrong, and move them in the right direction. Some of the information here can be labeled as controversial, but I’ll do my best to provide a heads up when I talk about something that goes off the beaten path from what most personal finance “experts” spoon feed to their audiences. For reference, I’ve put together a quick list of my own “ten commandments” for personal finance, which should provide some insight.
- Be Honest with yourself and your loved ones about finances. – Lying will only make things bad in the short run at best, and horrible in the long run at worst.
- Learn to understand cash flow, and how it impacts your life. – People don’t get in financial trouble from debt, they get in financial trouble by using debt to augment their cash flow.
- There are two fundamental components to getting out of debt faster: spending less and earning more. – If you are serious about getting out of any debt you have, these are your options.
- If you have any question about being able to afford something, you can’t afford it. – Sure, a 70″ LED TV would look great in your living room, but the $1400 it would cost at 26.99% interest that that store card will charge you is not worth it. Would you rather work 200 hours or 253 hours for something?
- If you don’t have a plan, you’re falling behind. – The old saying, “Failing to plan is planning to fail” is very true with your finances. If you want to get the most out of them, you need to have a plan. Whether you want to systematically eliminate your debts, buy a house, or retire, you’ll need a plan to get there. Living paycheck to paycheck and hoping for things to “just work out” is a recipe for disaster.
- Good or bad, own your financial decisions. – Whether you went and bought a boat, or you decided not to take that trip to Mexico with all of your friends, the decisions we make can go beyond our bank accounts, so the important thing to know is that you never want to deprive yourself of experiences, or be unable to make ends meet because of your decision to either save or borrow too much. As with all things, moderation is the key.
- Never be afraid to ask. – When I was young and dumb, I was always afraid to talk to my creditors, so I didn’t. As a result, I likely missed out on the chance to fix a lot of things, and pay lower interest rate. Just about everything in life is negotiable. Ask for lower interest rates for everything you have to finance.
- Don’t become a slave to your credit score. – A single number will not define your value as a human being. Check your credit report every 3-6 months to make sure it’s up to date, and pay down your balances to under 10% of your utilization (with the optional step of closing your newest credit line) 2 months prior to a major purchase (Home, Car, Boat, etc.)
- Pay your bills on time, not early, not late. – If you have an interest checking account, paying early will lower your average daily balance for the monthly interest, and paying late will result in a late fee. Getting in the habit of paying on the due date will make your life much easier and have a (marginal) financial benefit for you.
- If you can’t keep your finances straight, use multiple bank accounts or the envelope method. – This will help you avoid overdrafts, especially if you have multiple accounts, but only one of them linked to a debit card. Personally, I use a cash back rewards card that gets my spending money transferred to it bi-weekly to pay off the balance.
If you follow these, your financial situation should improve at every turn. The harshest truth is that the odds are highly unlikely that you will win the lottery and become an instant multi-millionaire. As a result, it’s going to be better to do the little things right so that you can live the best life possible.
That’s all for now. Until next time, go snack on some debt!