For almost 20 years I have been working with individuals and couples on different household financial challenges. Usually, several of these folks ask two questions. First, is my situation typical? Second, what are the main causes of personal financial problems?
From my experience working mostly with singles and couples who attend churches, the four items below are main causes of personal financial problems. I encourage you to understand them so you might avoid them.
1. Not realizing you can’t manage money
You can manage your attitude, behaviour, and choices (ABCs). You decide to spend using money. When you refer to money management, really, you mean lifestyle management. Unfortunately, society trained you to ignore income, affordability, and realities of life-stages. Instead, merchants, banks, and others encourage you to look at a ridiculous number called a credit score. What’s your ‘good’ credit score telling you? You have been in debt and stayed in debt without wild gyrations! Essentially, the world tells you to live in debt to maintain a good credit score. How ridiculous!
I suggest you start a capital fund–targeted savings to allow you to take on no debt, except to buy a house. Develop an attitude of saving before buying, using the capital fund for large purchases.
You will be ready to buy a house when you have saved 20% down payment in your capital fund, you are budgeting, housing costs fit in your budget, and you have a history of saving to buy.
2. Not working with a budget
Working without a budget is the number two cause of personal financial problems. With no budget, you don’t plan amounts and timing of expenses; you spend based on available credit. Effectively, merchants guide your expenditures. Unwittingly, you become contented living in debt, provided you have a “good” credit rating.
People tell me many reasons they do not budget. The number one reason: “I don’t have time.” Number two: “I am not a finance person.” The first is absurd because everyone has 24 hours daily. These people mean budgeting is not their priority. The second shows misunderstanding of budgeting: no one needs to be a finance person to budget. These folks have no problems spending; why not apply forethought and set goals and plans before spending? That’s the essence of budgeting.
When you don’t budget consistently, you will end up in debt. Surely, the budget needs discipline; but, that’s the cost of good stewardship.
3. Taking out a home equity loan
In hindsight, taking a home equity loan is the cause of personal financial problems people seem to regret most. Usually, the decision flows out of an emotional response to a TV advertising or from talking with a banking person. You might hear, “you are richer than you think.” Alternatively, your banking salesperson, otherwise called an adviser, might say, “let your home work for you.” So, you add to your mortgage and the bank sanitizes the increment and calls it an home equity loan. It starts the use of your home as an ATM. You don’t see an ‘extra’ loan; indeed, sometimes your mortgage payment reduces.
Think about this? Do you want to amortize a $2000 vacation over 20 or 25 years?
4. Signing agreements without understanding terms
Folks come to me complaining about auto dealers, furniture stores, and other businesses charging unreasonable interest. These people took a “no money down” or other financial ‘deal’ and did not read it. After six months, one or two years, they do not have funds to pay amounts owing and are surprised their interest payments start from the original purchase date.
Another frequent complaint comes from co-signing a loan. A grandma co-signs her granddaughter’s extra student loans. Her granddaughter can’t repay, so grandma must repay $50,000. Grandma is upset with the bank and cries foul; but that’s the agreement she signed.
This starts grandma’s personal financial problems when she should be debt free enjoying her retirement. Grandma forgot the “large print giveth, but the fine print taketh away”!
There are many other significant causes of personal financial problems; however, I see these four most frequently. Still, I think the generic cause is number one-people do not accept they can’t manage money. Obsession with credit scores traps them, and unconsciously, they live in debt.
Let’s understand you do not have to consider credit scores if you have a debt free lifestyle, which is doable with patience, humility, and dependence on the Lord. The first baby step is to start living in a sacrificial budget that deals with necessities only.
© 2014, Michel A Bell
Michel A. Bell follows Jesus, is an author of five books, speaker, founder and president of Managing God’s Money, and adjunct professor of business administration at Briercrest College and Seminary. For information on living a debt free lifestyle, visit http://www.managinggodsmoney.com/essentialtools/capitalfund.php.