ICFE eNEWS #13-06 - March 25th 2013
Most of us tend to do what we know, but once we know better, we should do better. - Dr. Phil
Nine Money Mistakes That Smart People Make
By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors.
As a veteran financial counselor I have counseled multiple hundreds of
smart people with serious financial problems. These people had different
incomes, different occupations, and were from different social status.
Yet their financial problems seemed to be the results of making very
similar "money mistakes." I have attempted to list these "money
- Being comfortable with debt. It is hard to understand how anyone
could choose to be a slave. Yet, history tells us that some slaves chose
to stay with their masters after they were freed. That's what they had
known for generations, and they were used to it. Some of them went on
living just slaves even though they were free. Why? Because over time
they had developed a "slave mentality."
Proverbs 22:7 warns us, "The rich rule over the poor, and the borrower
is slave of the lender" (NRSV). Debt enslaves us. It takes away our
freedom to choose to do with our money what we wish. Constant exposure
to debt cultivates a "debt mentality."
But imagine what it would be like to not have a mortgage payment or car
payment? Wouldn't that be freeing? Think what you could do with that
money if you were out of debt! You would not need much money to live,
you could seriously put money aside for the future, and you could give
money to people, your church, or other organizations that are important
It's time we stopped thinking about debt as an old family friend that
has moved in to stay with us forever! We need to kick him out and send
him on his way!
- Not knowing what we spend. The only part of the budget process most
of us know is "what we make." The part we do not know is "what we
spend." This money mistake results in 40% of Americans spending more
than they make each month, with most of them being unaware that they
How can this be? Because when they run out of money, they use credit
cards to continue spending. An illusion is created that actually keeps
them from knowing how they are doing financially. Bills are paid on time
so they assume they are doing fine.
It is absolutely essential for us to know how much we are spending each
month. Without that knowledge, there is no way to know if, where, and
how much to adjust our spending so that it is less than we make.
To know how to get to a destination, we must know where we presently
are. That's why the first step in money management is knowing what we
- Acting like credit cards spend money instead of borrow money. The
illusion created by such convenient credit card usage blinds us from the
realization that each swipe of the card is very similar to securing a
loan at our local bank. Money has been borrowed, not spent, and each
transaction is one in which we have created a debt.
Reality is not as the college student recently told me, "I am so glad I
have a few credit cards, 'cause no matter how broke I am, I always have
- Focusing only on monthly minimum payments. Focusing on the monthly
payments to the exclusion of the entire debt will usually lead us to
purchase things we cannot afford and pay double or triple for them.
This money mistake caused the single mother of three to think she had
paid $24,000 for her new SUV when in reality she had paid $45,360! To
"help her afford it" the dealer let her pay for it over a 7 year period
instead of the usual 5 years!
- Borrowing to "pay off" debt. Borrowing to pay off debt normally does
not work. It is similar to digging a hole in our front yard in order to
fill in a hole in our back yard! This "money mistake" yielded some
pretty disastrous results:
- Their borrowing did not actually "pay off" debt - it merely moved
the debt to a different location. Now they had a 2nd mortgage on their
home or a loan from their 401(k).
- The debt they paid off (usually credit cards) reappeared within 3
years. This occurred because their borrowing made it unnecessary to
change their spending habits.
- Equity borrowing turned an unsecured debt (credit cards) into a
secured debt (2nd mortgage). That's why the interest was less - the bank
would rather loan against your house than loan against your name.
- 401(k) borrowing often had a 10% penalty attached if the person was
not 59-1/2, plus the monies borrowed were taxed as income. At times 40%
of the monies withdrawn "disappeared" in penalty and taxes.
- When it came time to move, their house produced very little profit
and there was nothing to put down for the down payment on the next
- When it was time to retire, they could not because they still had
house payments because they had borrowed against their home and it was
not paid off.
- Co-signing a loan. Co-signing is a promise to repay another person's
debt if for any reason he does not. The liability assumed is for 100% of
the debt, thus, if $5000 is the total amount borrowed, the co-signer is
responsible for the entire $5000 if the other person defaults.
The co-signer's credit score can be affected if the primary signer makes
late payments or misses payments on the loan. Presently, 75% of student
loan co-signers end up making payments on the student loan.
- Having no emergency savings. A recent survey asked people if they
could get $2000 for an emergency? The results revealed that 55% of the
respondents said they could get the money within 30 days, but 92% of
those people said they would need to borrow the money from family,
friends, bank loans, or credit cards. Another survey revealed that 28%
of the 1000 people surveyed have absolutely nothing in savings (Blake
Ellis - CNNMoney June 25, 2012).
In other words, many people are simply not prepared for
- Creating debt for tax benefits or to establish credit.
Debt for Tax Benefits. It is good to claim every deduction that you can
on your taxes, but it is often not good to spend money in order to get a
An example would be the deduction one is allowed to take for interest
paid on a mortgage loan. If I paid $10,000 of interest and was in a 25%
tax bracket, I would receive a tax deduction of $2500. If I absolutely
had to pay the interest, I would surely deduct it. But if I had the
choice of paying my home off and having no interest to pay, that would
be my choice by far.
I would far rather have the $10,000 non-spent money in my hand than
receive a $2500 tax deduction. I may pay more tax, but on the other
hand, if I gave monies to charities, I would receive the same
Remember, you usually have to spend your money to receive tax
deductions. If you are not careful, you can tax deductible yourself into
the poor house.
Debt for Establishing Credit. One of my clients followed the advise of
her financial counselor and bought a house in order to build up her
In order to establish credit, you need to pay your bills on time, but
you do not need to maintain debt to do this. You can establish your
credit just as well by paying your credit card balance in full each
month as by paying minimum payments (and interest) on a revolving
- Thinking that good credit is the most important thing in life. There
is certainly nothing bad about having good credit, and there is nothing
good about having bad credit. Credit is most important to people who are
going to borrow money. Then it can literally save us thousands of
dollars by getting good terms!
But if one plans to get out of debt and stay out of debt, good credit is
not nearly so important. To those people it is viewed more as the
ability to go into debt with good terms. For people who very much
dislike debt, good credit is not nearly so important or necessary.
We do not have to be enrolled as a "student in the school of hard
knocks" to learn valuable lessons. We can simply obseve the money
mistakes others have made and be sure we do not duplicate them.
© Jim Garnett.
The information on this broadcast should be understood to be a general
discussion of the subject matter and DOES NOT constitute a legal opinion
about the situation. For further information please consult a qualified
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
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