With the increased awareness in our world of the various threats that can confront us, there is one that often goes un-noticed. Yet it is out there, in plain sight, an issue that virtually everyone deals with on a daily basis.
I am referring to personal finances, the burden it can place on us and the ways in which it can put us at risk. Whether it is debt, cash flow problems, or lack of a budget, not having your financial house in order can be as much a threat as neglecting to lock the doors of your home.
First of all, a disclaimer is necessary; I am not a financial planner or otherwise expert in the area of personal finance. For those who are in serious financial trouble I would direct them to the professional help that a personal financial advisor can provide. But for many people, finances are an area in which some thoughtful study, coupled simple planning, can yield a tremendous amount of personal protection.
Today’s world is much different than it was a mere generation or two ago. Not only are our habits and lifestyles different, the underlying assumptions in our culture have changed, and it has often led to disastrous consequences. A perfect example of this can be seen in the House Mortgage collapse of 2008. At that time home mortgages were being given by banks to individuals who did not have the means or income to make the payments. Housing was being sold at over-inflated prices, to unqualified buyers and the result – which was totally predictable – was that so many people de-faulted the credit industry collapsed. Indiscriminate lending was so rampant it gave rise to a new acronym; NINJA loans (No Income, No Job, No Assets).
Why were such individuals given loans by the bank in the first place? Just a few short decades ago, many of these people would have been denied such a home loan; not because the banks were being miserly, but because the lenders recognized that such people were simply not in a position to assume a mortgage.
If you think that such practices have ceased, think again. Take a moment to consider the student loan industry. The total amount of money tied up in student loans now exceeds that of the mortgage industry just 10 years ago. Roughly half of the money, which is supposed to be paid back with interest, is either behind payment or in default. Much of it may very well never be paid back. Students have assumed these debt, in many cases, without reading the fine print, or stopping to consider the total cost; and now many find themselves in serious financial trouble.
Why is this? The problem is, basically, one of easy credit; a financial situation where it is easy for anyone to get money. In times past, before you were given a loan, the bank closely examined your finances, refusing to make the loan until you were in a position to pay it back. I remember one of my High School teachers telling us that, once we graduated and had a job, the first thing we should do was to take out a small loan and then make sure we pay it back. The reason for this was it was important to establish a credit history, so that, in later years, you would be able to obtain a larger loan for a house or car. It was sound advice.
The Hidden Trap, Living On Cash Flow
Another way in which people get into trouble is by living on cash flow. In other words, people will look at the money that is in their hand and think it represents the money they can spend. Too often they fail to take into account that some of that money – and many times a lot of it – needs to be set back for future debts. The utility bill, the phone bill, the gas bill; all of these things need to be counted into the equation. If you fail to do this you end up spending money today on things you should not spend it on, and coming up short tomorrow when you need to pay your bills.
So what do we do to protect ourselves?
Financial Security and Budgeting
The first thing we can do is identify the threats. This is done by doing a budget. There are many good resources to help you learn how to make a budget. It involves estimating, as best you can, what your income is going to be and what your expenses will be. You can make a budget for a month, a few months, or even a year at a time. Then you decide how much money you will need for each item, as well as how much money needs to be set back each week to be able to cover everything. It can be difficult getting started, but once you do, it quickly becomes a way of life. It requires a commitment by all involved, the discipline of sticking to your budget, but you will find it will lessen your financial stress level immensely.
The second step is to begin to establish an emergency fund. Experts say that it should contain enough money to cover your expenses for at least three months, even longer if possible. A portion of income should be put aside in a dedicated emergency-only account, and not touched again unless truly needed.
The next thing that must be tackled is debt. Debt is like a horde of termites, eating away at the foundation of our house. Debt must be, first, prioritized and then, second, paid off. The guiding principle is that we should always minimize the amount of debt we are in as much as possible.
Consumer debt – credit card debt – should be the first to go. The interest rate on credit cards can be astronomical and will be a constant source of drain on your economic household. After your credit card debt is paid off, make it an absolute priority to pay off your credit card bill, in its entirety, every month. This means you limit your credit card purchases accordingly. And please remember, that minimum amount payable on your bill represents interest only! If you pay only the minimum amount each month you never retire any of the principle, and you need to pay off the principle as soon as possible.
Another area is car loan debt. This should be paid off as soon as you can. After you pay it off, continue paying your car loan payment each month; but this time pay it to yourself. Put the payment in an interest-bearing account, so that, instead of you paying the bank interest, the bank will now pay you interest. This can form the savings for your next vehicle.
House mortgages are long-term debt, but you can save a considerable amount of money by paying it off early. If you are in a position to do so, you can make an extra bank payment in the middle of the month. That extra payment goes to reducing the principle, not to interest, and it can save you thousands of dollars.
Saving is another way to keep your financial house healthy. Saving does not have to be in large amounts. A modest amount, put away at regular intervals, in an interest-bearing account, can result in a substantial amount of money after an extended period of time. The results will not be dramatic at first, but over time the growth will accelerate. For example $100 a month into an account earning 5% interest will yield over $6,000 in five years, and over $17,000 in ten.
Keeping yourself and your family secure involves a lot more than carrying a handgun and installing locks on your doors. Do not neglect your finances, or you may find a different kind of thief has stolen in.