loans

Are Traditional, Low-Tech Ways of Handling Your Finances Better than Modern Ways?

Electronic banking, ATM and credit cards, leasing, online shopping, installment plans and subscriptions, and anything else electronic is the way to handle your personal finances nowadays, but is this better? In some ways yes, but many ways not so much.

Transactions are too easy to make nowadays, which causes us to be more impulsive. It’s not just Amazon that makes it easy to purchase products, but even your local grocery store has online capabilities to place orders at 3:00 AM. The problem with this approach is that you do not feel, either physically or mentally, that you are making purchases, especially when using ATM and credit cards, which in turn, makes you spend more money. Traditional ways required more effort to both purchase items and to pay for them.

In the past, you had to wait until you received your bank statement in the mail to see what your bank balance was. Because of this, you were forced to record each transaction that you made in a paper check register to know what your real balance was. Most likely, you actually reconciled your checkbook to your bank statements on a monthly basis. Ironically, since it is now so easy to check balances and transfer funds, most people tend to pay less attention to the details.

Almost everything can be purchased or rented with small or no down payments and monthly payments. You can finance your iPhone and also that cute little puppy. You  can also cut your cable service to save money, but use 23 different, $9.99/month services and spend more money. It might seem minor, but it really doesn’t make sense.

Please let me know if you still save up to make substantial purchases. Substantial is relative to your situation, but most likely you will take out a loan or use a credit card. Tell your friends and family that you paid cash for your car and they will ask a lot of questions to determine your mental health. Today’s mentality is that if you want something then you should have it immediately. The tactic of delaying purchases is very effective if you want to have strong finances.

I don’t think that we need to go back to the way things were not too long ago, but we should consider combining the best of traditional ways and modern ways. Automatic savings is a perfect example of combining the new with the old. Can you think of others?

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Are You Too Financially Cautious?

Is it possible to be too financially cautious?  Cautious does not mean that you are just conservative or frugal with your money, but that you are too afraid to spend your money wisely. You may not even be aware that you are too cautious and here are some examples:

Hesitate to make the right investments: Aside from traditional investments, you may be too cautious to invest in your own education and knowledge, spend the money for new equipment and technology, marketing, or spending money on employees.

Too cautious about wasting money: If you are so concerned that you will waste your resources then you will end up spending too much time trying to save a nickel, but it ends up costing you a dollar. For example, you don’t want to spend the money to keep track of your finances in QuickBooks or even Quicken for personal use, but yet you incur hundreds of dollars of insufficient funds charges each month. I have seen clients spend approximately $10,000 for insufficient funds fees.

Not taking a loan when you should: I am not an advocate of borrowing money excessively or foolishly, nor do I think that borrowing should be avoided at all times, which some pundits advocate each position strongly for. However, sometimes you need to have a line of credit to smooth out some bumps or to take advantage of low-risk opportunities that arise. Alternatively, if you pay off all of your debts too quickly then you may not have any cash available.

Time versus money: Using your time productively strongly dictates your financial success. However, if you spend your time on $10 per hour activities that drive you crazy instead of paying someone to perform them, while you can be making $200 per hour, then that is a poor use of your time and financial resources.

Money before relationships: If you are too financially cautious then you will probably never want to get married, and if you do, then you will worry about not having enough money for your children and will probably not have any.

Another way of saying financially cautious is to be penny wise and pound foolish. Don’t try to save your pennies, but make dollars!

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Don’t Be a Co-Signer Unless You Want to Pay Someone Else’s Debts

Your friend, child, brother, or parent can’t get a mortgage or a car loan so they ask you to be a co-signer. Of course you will be a hero and co-sign for your loved one! But beware of the dangers before doing so.

In reality, the lender is assuming that the odds are fairly high that there will be a default on the loan, otherwise, why would they need someone else to co-sign on the loan? There are certainly many situations that the loan never goes bad, but why take such a chance? Consider this:

If the borrower defaults on the loan, then your credit will take a hit because you are personally responsible for the loan. The lender may also come after you for payments on a loan that you never benefited from. Actually, you had almost all of the risk without any real benefit.

If you are familiar with Murphy’s law, then you know that what can happen will happen. So, what if you are ready to obtain a mortgage or finance a car and then find out that the loan you co-signed went bad? You may not qualify for the loan for yourself or the terms may not be as favorable as they were originally.

One last item to consider is the damage to the relationship once a co-signed loan goes bad. As Polonius said over 400 years ago in Shakespeare’s Hamlet, “Neither a borrower nor a lender be; For loan oft loses both itself and friend . . .” Even thousands of years before Shakespeare numerous bible versus were also written to warn against co-signing such as Proverbs 22:26-27 and Sirach 29:16-18.

Be Careful Who You Loan Money To

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A friend is in a pickle and asks you for a loan of $5,000 because they hit some hard times and have some bills to pay. Do you help out your friend and say yes, or simply say no.

If you say no, then your friend may get upset, get behind with bills, but hopefully they will respect your decision. I recommend to never loan money to friends or family, but in case you end up doing so you need to formalize the process. Better yet, give the money as a gift with no strings attached or expectation of being paid back.

If you do say yes, your friend is happy and you are happy to help out a friend. And your friend will pay you back . . . or will they? And when? Here are a few tips to make sure that you do not damage your relationship with your friend, which is probably much more valuable than the money in most cases. You can easily substitute family member or employee in the place of friend, which is a very common situation too. I am big believer in having things written down so there is a mutual understanding between everyone, and here are some important factors to have in writing and to consider:

Loan vs. Gift: Your agreement states that it is a loan, so there are no misunderstandings about this fact.

Amount of Loan: How much are you loaning.

Interest Rate: How much is the interest rate you will charge?

Length of Loan/Payment Schedule: Is the loan for a month, a year, five years? How much will the payments be? What about late fees?

These are some basic items to consider, and the most important is to have it in writing even if it is a very basic agreement. If your friend refuses to sign the agreement, then this is a sure sign that you will most likely not get paid and will lose both your money and your friend.  It is always wise to seek legal guidance when warranted.

Don’t Take “No” for an Answer!

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What does not taking “no” for an answer have to do with financial matters? Plenty! Very often when we ask for something the response is “no” or is not what we wanted. This can happen when dealing with business or personal matters and it can cost you significantly.

When applying for a loan, it is not uncommon to get denied or receive unfavorable terms. But should you accept this or keep moving along? Unfortunately, we tend to take rejection very personally, but we have to be objective, see what we can do differently, and ask another lender. If getting a loan for your business or a mortgage is crucial to your livelihood then it is important to seek another lender.

What about asking a customer service rep for a lower rate on your credit card? Nowadays, the credit card companies are very hard to negotiate with, but that doesn’t mean that you should stop trying.  When you don’t get the rate you are looking for, then ask to speak to a manager, or maybe even try to call back at another time.

Has anyone ever told you that you should not start a new business venture or switch jobs? Don’t take “no” for an answer. If your plan is well thought-out and it really makes sense then do not let anybody tell you not to do it.

We only have one lifetime so make sure that when you look back at your life you were not afraid to move forward. Don’t let anybody tell you “no” when you believe the answer should be “yes.”

What’s In Your Credit Report?

When we apply for loans, search for a job, or even take out an insurance policy, our credit report is used in the process. Your credit report shows all of your outstanding debts and lines of credit, including credit cards, mortgages, auto loans, and personal loans. Even accounts that have been closed or debts that have been paid off will be shown for years. All of this information is used to apply a credit score to you.

It is important to make sure that you pay all of your bills on time and don’t incur too much debt so that you maintain a healthy credit score. Sometimes, incorrect information may inadvertently be placed on your credit report, which will negatively impact your credit score. The higher your credit score generally means that you will pay a lower interest rate when applying for loans, which can save you hundreds or thousands of dollars each year.

Although there are a lot of companies that will provide you with your credit report for a fee, you are legally entitled to one free credit report per year by each of the three credit reporting companies. They are Equifax, Experian, and TransUnion. The website to obtain your free credit report is www.annualcreditreport.com, which is very user-friendly. I recommend obtaining one report every four months from a different credit reporting company so that you will never have to pay for them.

Once you have your report you should review it for accuracy. If there is a mistake, such as an account that shows that you have been late, you will need to contact the credit reporting company who issued the report to have it corrected. Most likely you will need to contact all three companies to have it straightened out.

One last note: According to the Federal Trade Commission (FTC), you should be skeptical of companies that claim they can repair your credit. Some of their business practices are fraudulent and many of the steps you can take yourself at little to no cost. You can go to this page: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm.