Saturday, May 19, 2007

Managing your personal and household finances

There is an interesting article in The New York Times by John Leland entitled "Couple Learn the High Price of Easy Credit" which highlights a number of personal and household finance issues. Although nominally an attempt to blame it all on "easy credit", it ends up demonstrating, at least to me, that easy credit is not the whole problem or even the heart of the problem, but rather that the lack of planning and discipline is the root of most personal and household finance issues.

Read the article for yourself, but it caused me to appreciate the critical importance of some key personal finance principles:

  • Have a budget, for all income and expenses, for the coming year. Know where every dollar of expense can reasonably be expected to go, and where every dollar will come from to pay for those expenses.
  • Never wait for a "bill" before deciding how an expense will be paid.
  • Respect your financial obligations. Maintain that budget and have an organized file box (one per year) with a manila folder for each account or activity that even vaguely has a dollar sign associated with it.
  • Ruthlessly pay your bills on time as if it were a religion in which you were a zealous true-believer. Resolve to pay them early if you have trouble with procrastination.
  • Keep your budget in a simple computer spreadsheet. Nothing fancy, but easy to access, easy to update, and easy to read.
  • Log every expense as it is incurred in a computer spreadsheet, whether it be a check written, a credit card charge, a bill paid, etc. There should be no surprises when the "bills" finally arrive because you will have it all planned out in your budget and expense logs.
  • Keep a computer spreadsheet for your checking account and update it at least twice a week for both income and expenses so that you always know how close to the edge you might be.
  • Set aside a non-negotiable time allowance each week, if not twice a week, for reviewing your personal finances.

There are two simple facts: 1) if you follow the above principles you will do just fine, and 2) you can't blame "easy credit" for failing to follow these principles.

Yes, it is true that loss of a job or medical problems can devastate even the most disciplined of budgets, but that is no excuse for people with decent jobs, and even two-income households, and in good health to claim that the banks and finance companies are the cause of their personal and household finance problems.

When I read something like "sorted through the plastic laundry basket where she keeps the family bills, statements and coupons", I cringe and realize that this is someone who is so disorganized and undisciplined that they are literally begging for financial ruin. This is an example of the need for my principle of respecting your financial obligations and the need to be organized. Get a file box and manila folders, not a laundry basket! And, where do they keep the family budget and expense log? I suspect they simply don't.

When I read something like "how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit", I cringe again and it confirms for me that these are people who have no sense of respect for their financial obligations and are literally begging for financial disaster. Don't blame the credit card and finance companies for this family's total lack of respect for its financial obligations and total lack of discipline.

When I read that they "have run up avoidable penalties and occasionally spent themselves into more debt or higher interest rates", I cringe again and the passage only reaffirms that the credit card companies and finance companies are being unfairly blamed for the couple's lack of organization and discipline.

When someone says "It doesn't matter what you do, you always have that credit card debt", it once again points to their own lack of budget, lack of organization, and lack of discipline, not some problem created by the credit card companies or finance companies.

When I read that the husband, who is a software applications designer who should know a little about organization and discipline, "used a debit card rather than a credit card to make nine purchases, ranging from $5.38 to $48, hoping to avoid finance charges. But he miscalculated their checking account balance. Each purchase incurred an overdraft charge", once again I ask where that budget and expense log and checking account spreadsheet are. In addition, I don't care how deep in debt you are or how many credit cards you have, but there is no excuse not to keep a low-limit card exclusively for expenses which must be paid off each month, and hence incur no finance charges and avoid problems with cash flow through your checking account. Bottom line: There is simply no rational excuse for blaming the bank, credit card companies, or finance companies for lack of personal organization and failure to track your budget and expenses. Sure, everybody makes mistakes, but don't blame financial institutions for anything that happens as a result of your own boneheaded blunders.

When I read that "Every two or three months they send in a payment late, running up a late fee of $30 or more", I cringe again as we once again hear about people who of their own volition refuse to be organized and refuse to be disciplined, and turn around and blame financial institutions for their own personal mistakes. A sane person would expect that after paying late fees two or three times, they would come up with a plan to avoid paying bills late again, ever. Remember, this is a two-income household with a fairly healthy income stream, so paying late is primarily a result of failing to regularly track their budget and expense log.

I'll give the couple a free pass on the whole marriage and home improvement thing. Those were decisions they made and priorities that they had. But, please don't blame the finance companies for those decisions.

But when I read that "if the cat gets sick or something, then suddenly we're trying to figure out, what kind of card can we use to pay this $500 vet bill", I cringe again as we are once again faced with the finance companies being blamed for personal lifestyle choices. Good grief... if we didn't have "easy credit" we would probably be reading an article about how their cat died because the bank wouldn't loan them money to pay the vet.

Then comes the straw that breaks the camel's back as we read that "It's been almost two weeks since we've had time to sit down and go over the bills... You can't do it every day because... they want all our attention... We're trying to... We have to do... We're exhausted... And on the weekends... and we want to spend time... we don't want to spend time going through the bills." This is simply a total lack of commitment to a core activity for any household. There are countless demands on the time of everyone in every life situation. They say "since we've had time", but the key, tell-tale flaw that illustrates the almost complete lack of organization and discipline is that this couple fails to acknowledge that they have to "take the time" or "make the time." This absolute refusal to accept responsibility for managing their own financial matters is certainly a choice that they can make, but I find it deeply offensive that this abdication of personal responsibility is used as the closing paragraph for an article whose thrust is to blame their financial predicament on "easy credit" and the institutions that provide it.

Please, please please, accept responsibility for managing your own personal and household finances and please, please, please refrain from blaming financial institutions if you won't take that responsibility.

-- Jack Krupansky

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