If you want to know what’s wrong with people’s personal finances, just observe those who are willing to borrow money in order to borrow more money! One example is using a credit card you can’t pay off in full each month, for a downpayment on a car. Since the limit for credit card use for buying at the car dealership is usually $3,000, and given most downpayments on vehicles range from $0 to $3,000 to buy or lease, using the credit card is a tantalizing proposition.
Forget the fact that these car buyers don’t make 10X the value of the car in annual salary. They can’t even pay cash for the car or come up with even 10% of the value of the car as a downpayment! Look, I know more than anyone how alluring it is to buy a nice car. I used to be a car addict with 7 different cars in as many years. It’s just irresponsibile of consumers to use their credit card for a downpayment when they don’t have a healthy savings account balance to match the entire value of the car before purchase.
BANK OF MOM AND DAD FOR REAL ESTATE
The other common example is college grads borrowing a housing downpayment from their parents. I can live with this, if you are paying your parents back with interest. What frustrated homebuyers fail to realize when buying in international cities such as San Francisco, Paris, Hong Kong, London, and New York is that they aren’t up against just the buyer, they are often up against the buyer’s bank account PLUS the bank account of mommy and daddy!
I see it time and time again at open houses where a 26 year old is checking out a house with his parents. He’s asking mommy where he should place the dining table, and daddy whether the big screen TV he’s going to get for Christmas will be able to comfortably fit in a particular nook. These grown kids are looking at properties valued between $600,000-$1,000,000 here in San Francisco. Not bad if you have parent’s willing to spend!
People wonder why housing prices haven’t gone down much at all in SF and NYC, and it’s because of the generational bank accounts that keep kids afloat.
The question is, do you ever pay your parents back? I mean, if you’re 30 years old and still living off the parents, doesn’t that do something to one’s pride and self-esteem?
BORROW TO BORROW FOR EXPERIENCES?
Borrowing money you don’t have to be able to borrow money on a depreciating asset like a car is one of the dumbest things you can do for your personal finances. Most “things” depreciate, which begs the question, “What about borrowing money for an experience you can’t afford?”
The cruise for two we took last year cost about $10,000 total, including air fare. We had to put a $2,000 deposit to secure our suite for 12 nights. This is where the temptation to borrow the $2,000 arises and infiltrates your personal finances like Team 6 getting Osama. I plopped down my credit card of course, because I wasn’t about to mail a check. I can see the temptation of just paying the minimum, but even with my good credit, my credit card interest rate is 10%!
Thirty days later, I paid off the balance and a month before we set sail, I paid off the remaining balance. If I could not pay for the $2,000 deposit after 30 days interest free, I would not have gone on the cruise. I do believe good experiences appreciate over time. However, if you are to borrow money, you better hope that your good memories appreciate faster than the size of your debt balance!
JUST SAY NO TO BORROWING WHAT YOU DON’T HAVE
It doesn’t matter whether you are buying things or experiences on debt. If you can’t afford to pay for the downpayment yourself, you certainly should not be borrowing money to borrow more money. You cannot afford it, just like I can’t afford to fly business class and drive a Lamborghini.
Tell yourself you are poor. Tell yourself you are unhealthy. Tell yourself you are undeserving because you did poorly in school, ate too much, and don’t work hard enough. Whatever the case may be, tell yourself that you don’t deserve these things or experiences simply because it is the truth. Your personal finances will thank you down the road.
RECOMMENDATIONS TO BUILD WEALTH
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their brand new Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2016 and beyond
Photo: Swans with their babies at the Palace Of Fine Arts, San Francisco, SD, 2015.