[The following is a guest post by Kevin, a credit counselor who blogs at DebtEye]
Over the past few years, I’ve met with hundreds of clients face to face who were looking to get out of debt. They come to me looking for tips & advice on different ways to get out of debt.
As a credit counselor, we must closely examine their financial health before recommending any type of debt relief program. I usually preface the counseling session with, “How did you get into debt? What happened?”
After listening to their stories, it’s interesting how you can see a pattern after speaking with hundreds of people in debt. You would probably think that a lot of them suffered some sort of catastrophic financial hardship such as: losing a job, death in family, or unexpected medical expenses, without an emergency fund. Think again!
4 Reasons People Fail With Finances: What I Have Learned As A Credit Counselor
After listening to my clients, here are the patterns I started to notice:
Huh? What does APR mean: I ask all my clients to bring in a copy of their most recent credit report, or a copy of their latest credit card statement. When I ask them what their APR is (before I look at their statement), most of them have no clue what I’m talking about. Everyone who carries credit card balance should ALWAYS know how much in interest their paying every month! Read the fine prints!
I think I spend $200 in food: If I asked you how much your mortgage was, or even your car payment, chances are that you would be able to tell me right away. What if I asked you how much you spend on food every month? Most people don’t keep track of their expenses. I know it sounds cheesy, but starting a budget worksheet will help you organize your finances.
Your mortgage is how much? : What ever happened to the 31% housing ratio rule? Do people not follow it anymore? Over 60% of the clients had their housing ratio 31%+. It’s no wonder they have no money left over every month! When you plan to buy a house in the future, do yourself a favor: Stick with the rule, or be part of the statistics (like one of the many going through a Bank of America foreclosure).
Today, today, today: Most people only care about the present. They only care about how much money they can save today. How can I lower my monthly payments this month? If I borrow money today, I can pay it back tomorrow. This is a dangerous path to follow. Stop thinking about today, and start thinking about the future!
I’m sure many of you may be guilty of some of the things I mentioned. If you’re not in financial distress, consider yourself lucky! I recommend everyone to really take a close look at your personal finance. I don’t want to see any of you in my office!
Kevin is a co-founder @ DebtEye where he helps people get out of debt by finding the optimal solution to pay off credit card debt. He is a certified credit counselor and previously owned a credit counseling company before joining the DebtEye team.
photo by Chris Sharp
It’s hard living in credit. I don’t like spending “money” that is not mine yet.
Financial education is badly needed in this country. We need to start at school age where there’s a captive audience.
I had a friend who told me using a credit card was like having “free money.” She had no idea how much her APR was or even how to contact the credit card system. We haven’t talked in years; I wonder if she is in credit card debt now.
It really is amazing how widespread this financial irresponsibility really is. I personally think that most people experience negative feelings when thinking about their finances. It’s scary to them. So they don’t think about the future and quickly spend whatever money that they have access to. There’s nothing wrong with spending a little money and living in the moment, but at some point there needs to be a realization of what is going on with their personal finances.
I see the same trends with the people I coach. When I ask them for numbers to create a workable budget, they have no idea how much they’re spending on food, entertainment, cigarettes, and more. They’ve just been paying as they go, not paying attention to much of anything except the regular monthly payments. Once they start tracking their spending and sticking to the budget, it’s amazing how much money they free up for debt reduction!
When I was getting approved for loans for our house, I was flabbergasted with how much they’d let me borrow. I was only borrowing enough for about half the house they’d let me get. This definitely gets people into a lot of trouble.
Good points. I must admit at one point I was victim of the 31% rule on the mortgage, but that is because my income was basically wiped out. There wasn’t much I can do. I am now back close to where I was earning when we bought the house, which is why things are much better, but having a home mortgage as too much of your income is very dangerous.
I would have never guess so many people were in this situation, but I guess that is why the economy and housing market is in such bad shape.
Ok, I’ll admit it too. I didn’t follow the 31% rule. I believe I was around 38%. But that was only through verified income 🙂
Great tips. It is truly sad how ignorant people are about their own finances. If they want to get out of debt they better start becoming informed and creating a strict budget. Complaining doesn’t make debt vanish.
I am always shocked by how little people know about their own finances, such as how much they spend. I agree – no wonder you are in debt if you don’t even know how much you spend!