Over the years of counseling thousands of consumers on their finances I’ve seen several common mistakes that hold people back from getting effective solutions. The middle class in this country is disappearing and people are either moving up or down. Intelligent people who make good decisions are moving up to live comfortably and with financial security, but unfortunately most of the middle class is moving down, to struggle and face debt and financial issues the rest of their lives. This is no accident, and to win the game you must understand the NEW rules of debt, credit, and finances in our economic landscape. Avoiding these common mistakes is a good start:
1. “Juggling debt” or using credit cards to keep up. If a consumer is negative on their budget and losing money every month, the savings account usually gets depleted first and then the credit cards become the catch-all for expenses. It’s important to address the fundamental problem and get a solution instead of just “juggling” debt. If you are using credit cards to help cover your mortgage or paying debt with other debt because you’re going negative every month, it’s time to get a real solution.
2. Not balancing your budget. First off you must put your budget on paper. You’ll never get your finances under control until you know where your money is going and what’s hurting you. If you are negative every month, or even don’t have much breathing room, take a look at what changes you can make to turn things around. It’s very simple these days – you have to make more than you spend without counting on debt to bail you out.
3. Protecting your credit score and not your bank account. I see it every day – misinformed consumers making financial moves to protect their credit score instead of getting solutions to financial and debt problems. The rules of credit and what it can do to help you have changed 180 degrees since before the financial crash. Listen up – your credit score won’t bail you out, you can’t retire in your credit score, it won’t pay your bills, and it’s NOT a safety net. May people are hurting themselves financially to protect a credit score that they can’t even use!
4. Cashing out a 401k or retirement funds. Unfortunately some people deplete their 401k and retirement accounts in order to pay living expenses. I understand this if it actually solves the problem and you are in a much better financial situation, but too many people take out their life savings and use it just to keep paying the negative for a few more months. Then six months later they are in the same predicament and scrambling for a solution. Cashing out retirement accounts before 59 ½ often come with steep surrender charges and taxes, meaning you might get only $1 for every $1.40 you withdraw, as an example. DON’T DO IT! If you are in that position then consult with the right professionals to make sure you know what solutions exist to eradicate your debt and financial issues AND preserve your retirement.
5. The perception that credit cards are a safety net. Many clients I’ve counseled who have debt issues are scared about giving up their credit cards. They are clinging to the false perception that credit cards are their safety net. They are not. Banks can cut available credit, cancel cards, raise interest rates, or otherwise screw up your plan at any time. Remember the home equity lines of credit we all had on our homes years back that got suspended overnight? This will happen especially if you are maxed out with debt or missing payments on mortgage or other card payments. The only real safety net is money in savings that you control and no one else can touch.
6. Not worrying about defaulting on real estate but overly concerned with missing credit card payments. Many people don’t realize the huge potential implications of walking away from a mortgage, including damage to credit, the possibility of legal action and judgments from your lender and huge tax ramifications, but for some strange reason they are very scared about missing small credit card payments. Realize that the implications of defaulting on hundreds of thousands of dollars of SERCURED debt are far greater than missing payments on tens of thousands of dollars of UNSECURED debt. Of course we don’t advocate missing payments at all, except in some cases a financial hardship exists where the consumer can not pay, and is implementing a solution like a bankruptcy or debt settlement under the advice of a qualified attorney.
7. Listening to the wrong people for debt advice. Would you take financial advice from your broke friend? How about real estate advice from someone who just lost their home to foreclosure? It happens all the time. DO NOT listen to your neighbor, your friend, or get your information online (probably 50% of the information online is inaccurate, incomplete, or downright scams). Go to an attorney first for legal advice on any credit card, debt, real estate, or mortgage issues. Go to your realtor for advice on buying or selling a home but not legal or tax advice. Go to your CPA for only tax advice and your financial planner for advice about investments, but not on issues they don’t specialize in.
8. Waiting. The real estate market isn’t roaring back any time soon, in fact it’s going to get far worse the next couple of years. Interest rates can’t get any lower and will start rising to curb inflation. The bailout already happened and very little of the money trickled down to us. Modifications are more and more difficult to achieve. In 2012 much of the tax amnesty and legal protection for homeowners expires, and we don’t know to what capacity they’ll be renewed. Waiting for a magical solution some time at a theoretical later date is the same as completely denying the problem and will only make it worse. DO NOT WAIT to get good information and implement the correct solution.
9. Unrealistic expectations. No one is going to pay your bills for you, no one is going to give you the equity back that you’ve lost on your home or investments, you probably aren’t a victim of fraud if you signed the paperwork, you are not going to get your home for free because there were RESPA violations, the bank isn’t going to reduce your mortgage principal, the bank is not on your side, and the credit card companies are not going to go away overnight. Stress, emotion, and desperation about our finances often cause us to have unrealistic expectations that hold us back. Real problems that took years and conscious decisions to create take time and correct decisions to fix.
10. The “Do it yourself” mentality. When considering taking on the huge task of representing yourself in some debt relief negotiation, ask yourself this: what is it I DON’T know about what I’m about to undertake. The answer is usually a lot. That is why you enlist the right professional to help you. Many consumers make bad decisions based on trying to save them a quick buck. You have to realize that that thinking got you into this mess to begin with, and probably will get you in further trouble. You have the change the pattern of decisions you’ve been making, and hiring a professional that specializes in that area of debt relief will pay for itself many times over, and most services work on contingency or with guarantees. The goal isn’t to try to solve the problem, but to get it right.
Call us for a free review of your debt situation and to be connected with the appropriate attorney or financial professional.
916-548-6350
norm@unityfs.com
www.unityfs.com
