Wednesday, February 5, 2014

"Count the Cost" - Do You Know What You Owe?














Well, it is now February 2014, and those holiday shopping expenses have begun showing up on your monthly credit card bills. Or, if you are like some cash-buyers, perhaps you deferred paying certain bills in order to buy Christmas gifts, attend parties and eat out with friends; or, perhaps you took that special holiday trip you’ve always wanted to take.


Either way, it is time to pay the piper. The day of reckoning has come, and I’d guess it is not very welcomed right now. According to a study by the American Research Group, the average American planned to spend about $801 on holiday shopping in 2013, which is down from $854 in 2012. You can read their report at the: American Research Group website.

Do You Know What You Owe


Knowing this, just how ready are you to face the bill paying process this month? More to the point, do you even know what you really owe in 2014? Not just what your holiday debt may be, but what new expenses you might be facing in 2014?

At an average credit card annual rate holding between 14% (Fixed) and 16.5% (Variable) in 2013, Americans paid $12 billion in credit card penalty fees alone, this according to R.K. Hammer/Card Knowledge Factory, and Bankrate.com.

Ironically, that amount is down from $17.8 billion in credit card penalty fees paid in 2012, the only bright light in this story.

And with many Americans planning to make the mere minimum required monthly payment—ranging between $30 and $50—paying down your 2013 holiday shopping alone could take an average of five years once you discount each minimum payment by the total of fees, charges, interest and possible penalties. Yes. It is conceivable that as much as 10% of each minimum payment you submit actually gets applied to the principal balance owed. So, if you spent and charged the average $801 on holiday gifts, you will be repaying for the privilege of using credit (and incurring debt) for years and not months.

So, again I ask, “Do you really know what you owe in 2014?” And, even if you think you do, are you prepared to address your total budgetary needs in 2014?

Budgets Are More than Spending Limiters


A few days ago, my 22-year old son’s car broke down in a recent snow storm in Virginia.  Rather than just having to install a new battery (for $109), he ended up incurring—but not paying for—a towing charge and mechanical work adding up to the tune of $828.  That is a total of $937 that he needed just for 1 auto repair incident.  And it would have been more if I did not have Emergency Roadside Service in my auto insurance policy.

That point set aside, my son was now in a predicament where he had to choose from one-of-three available options:  1) to pay out-of-pocket from savings set aside for another goal,  2) establish and incur conventional credit to cover this unexpected expense;  or,  3) borrow the money from dad rather than through some merchant credit program charging usury rates of interest.  In effect, these were his immediate options for addressing this pressing need.

Without option 1 being actionable, and not wanting to incur a hefty credit account charge for a few years, my son did as most would elect:  borrow from their parents at a zero to modest interest rate.  Of course, making the expense an outright gift would certainly be preferable to any borrower, but what would be the object lesson learned?  Here was an ordinary occurrence that many face in life every single day, and therefore it is a great opportunity to help someone young learn in the process.

For my son, his proverbial straw is an unexpected automobile expense.   Have you stopped to determine what, if anything might be the straw that breaks the camel’s back in your financial plan?

LifePlanning Is a Solution


While debt should be avoided at all cost, the reality is that most people will rely upon it at some stage of their life.  It is possible to buy your first car or home or even attend college without ever incurring debt and it may not.  More realistically, we should plan our normal life events and anticipate—and plan for—the unexpected events which could severely cripple any momentum we make towards getting ahead in life.
 
This means plan your spending around the goals that you intend to pursue and achieve, and revisit your overall plan at least twice per year.   Click here to see how the LifePlanning Institute can help you establish a unique plan.

My son is fortunate that dad chose to help.  Not all situations offer the same remedies.  So, if you are pressed into choosing from other options:

  1. Try to keep the length and interest rate you may incur to a minimum.
  2. Revisit your Spending Plan and adjust it to make higher monthly payments
  3. See whether family or friends might help without charging interest
  4. Expect, on the other hand, that even family and friends have the right to say No!
  5. Don’t beat yourself up over these situations. They happen to the best of us!

May The Lord Bless You!


ENDING THOUGHTS:

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