ICFE eNEWS #16-36 - October 28th 2016
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For weeks I have been working on this article trying to find just the
right words to express my thoughts. Then, yesterday morning as I was
fixing breakfast, a guy on a radio ad said exactly what I am trying to
convey to you.
The ad was one for a nationwide mortgage lender, and the man in the ad had just been notified that he had been pre-approved for a mortgage loan. With that news, he confidently exclaimed, "Now I know how much house I can afford!"
What he meant, of course, was that he would now shop for houses in the price range of his pre-approved loan. He had decided that if he was given access to that amount, he must be able to afford that amount.
This same scenario is played out in many different areas, whether we are talking house loans, car loans, student loans, or even credit limits on our credit cards. The thought process works something like this: "They would not offer me that car (house, boat, credit limit, or loan) unless they were absolutely sure that I could pay for it. After all, they work with finances every day and know much more about what I can afford than I do."
This thinking places the lender/seller in the position of being a personal financial consultant whose purpose is to tell us what we can afford.
So let me ask you, "Does Accessibility Equal Affordability?"
I believe it does not. And furthermore, I believe that this assumption is responsible for many Americans buying things they cannot afford, living beyond their means, and eventually digging a hole of debt from which it may take years to escape.
A recent Rasmussen survey revealed that almost 50% of the 3000 people surveyed said they at times spend more than they make, and 36% of this 50% said they will dip into savings to make up the shortfall. Another 22% of the 50% said they will use their credit cards more in order to remain current on their monthly bills. Still another 8% of this 50% said they will borrow in other ways to compensate when they have spent more than they made.
An interesting note is that only 10% of those who said they spend more than they made admit they are "living beyond their means." I always thought that "spending more than you made" was a good definition of "living beyond one's means."
Especially, with reference to credit card limits, accessibility does not equal affordability. This is verified by the fact that most credit card holders do not pay off their balances at the end of the month, and of those who do not, the average family combined balances total over $15,000!
If accessibility does not equal affordability, how does one figure out what he can afford? And if we should not rely on the loan officer or seller to determine for us what we can afford, to whom should we rely? Simply: We Should Rely On Our Self.
"But I do not have a degree in finances! How would I go about figuring our what I can actually afford?" The good news is this, dear friend. It does not require a degree to figure that out. It really is not that difficult. Let me outline how to do it in three simple steps.
First, we must discover what we presently spend. That is something most of us do not know. So, we must gather our credit card statements and our checkbook ledger to see where and how much we are spending each month. Be sure to reduce bigger expenses like property taxes and insurance premiums to a monthly amount so you don't forget to include them. Also include how much cash you spend by keeping track of it in a pocket notebook for 30 days (This may be a real shocker!).
Second, we must compare that amount to what we make. Again, reduce all sources of income to a monthly amount. If we are already spending more than we make, we have two options: make more or spend less.
Third, decide if the added expense is feasible. Ask yourself questions like these:
• Do I already have enough money left over to cover this added expense?
• Can I cut back on other expenses proportionately so as to allow for this new expense?
• Am I willing to work more in order to generate more income until the item is paid for?
Comparing our spending to our earnings is the only way to accurately know if we are in a position to take on additional expense, and if so, how much. Sadly enough, because of our frequent use of credit cards, most of us do not know.
Going through this three-step process requires only a knowledge of elementary math, but it will put us way ahead of the curve in knowing what we can spend at any given time, and what we have to do to make it happen.
Accessibility does not equal affordability. Being able to get it is not proof that we can pay for it.
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
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