The Relationship Between Fear of Change and Consumer Debt

It seems that change is always unexpected and feared. And yet change is always all around us. Life is creation, and creation brings about change. Creation occurs constantly. There can be no life without it. So change is a constant, as well. You cannot escape change. Yet, you assume change will not happen. How do I know? Because you get into debt.

Assumptions about your future financial status are erroneous

When you take on consumer debt, you assume that nothing in your financial life will change for the worse until the debt is paid off. You get into debt based on your income and financial stability at the time you agree to the loan. You assume those factors will remain the same or get better over the term of the loan, and so does your creditor. This is an erroneous assumption. Change occurs the second you sign the loan papers: Appliances in your home are wearing out. The paint on your house and the shingles on the roof are deteriorating. Your children are growing. You and your spouse are getting older. The brake pads on the wheels of your car are getting thinner. The economy is in flux. Terrorists are plotting another 9/11. Your wife is pregnant but won’t know it for another month. The company you work for is planning to downsize, but a public announcement will not be made for another six months. The list could go on and on. At least some of this change will put demands on your finances and may affect your income in the months and years to come. If enough of the wrong kinds of change occur, you may not be able to make the payments on the loan, or you may have to juggle other obligations to make the loan payment.

What about positive changes?

What if change brings good fortune? You will have no trouble making the payments on the loan, but you will probably take on more debt given your improved financial status. Isn’t that what happens? Isn’t that what happens until change brings misfortune?

Debt and change lead to more debt

When change puts the clamps on your finances, what do you do? Why you borrow some more if you can, don’t you? You hope to get out of debt by taking on more debt. And then hope nothing changes for the worse until you can get your financial house in order.

The Great Recession of 2007 should have taught us that spending money before we have earned it is risky, that the money to repay the debt may not be there in the future because of relentless and unpredictable change. But we have short attention spans and credit is cheap.

Debt causes a fear of change

We fear change because we have already bet on the future with debt. When change comes, we resist or deny it is happening. We assign blame and scapegoat. We enlist the government to play games with interest rates, manipulate markets, and bailout corporations all in the name of preventing change. This meddling doesn’t avert change, it just produces unintended consequences, which is another name for change.

Change is inevitable; prepare for it

You cannot escape change. Why not prepare for it and embrace it? One way to do that is to avoid debt. Avoid committing future income to debt repayment. To avoid debt, you must have a cash reserve. Where else is the money going to come from to pay for expenses that exceed your normal monthly spending? A cash reserve comes from saving. Saving is possible if you spend less than you earn. If you spend less than you earn you will not only have cash to pay for expenses that exceed your normal monthly spending and to supplement your income during financial adversity, you will have the financial flexibility to adapt to change. The amount you save each month is a buffer against a reduction in income or an increase in monthly expenses. When income is reduced or expenses increase, you can reduce or eliminate saving until either the situation passes or you adjust to it with additional income or a reduction in spending.

Let me give you an example: My wife, Rosa, lost her job as office manager a couple of years after we had wed. She worked for a wholesale florist who did a lot of business in Mexico. The Mexican peso had been severely devalued and this cost the wholesale florist a lot of business. Rosa was laid off. During the few years we had been married, we based our budget on one income even though we both earned paychecks. We saved the other income. When Rosa was laid off, she substitute taught for a few months. She liked teaching so well, she went back to college full time to complete her bachelor’s degree and earn a teaching certificate. Upon completion of her degree and certification two years later, she began teaching full time. Over that three year period, we were able to meet our monthly obligations, remain free from debt, and continue to contribute some money to savings each month. Rosa paid cash for the completion of her degree and certification from the money we had saved prior to her layoff.

Rosa might never have finished her degree or become a certified teacher if it hadn’t been for that layoff. Because we were financially prepared for change and embraced the changes that occurred at that time, we came out of the situation three years later stronger financially and making much more money than before the layoff. Twenty-five years later, Rosa’s teacher’s pension and retirement healthcare benefits allowed us to retire at age 56.

A cash reserve is not an option

If you want to deal positively and successfully with change, saving is not an option because change is not an option. Start building a cash reserve today by cutting your monthly living expenses until you are spending less than you earn. Save the difference. Do this even if you have debt. Make timely payments on your debt and it will eventually be paid off. Paying off debt is not the problem, a lack of savings is.

Accumulate a cash reserve and you will no longer have to fear change. In fact, it will become your friend.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Owning vs Renting: The Long View

Owning a home used to be a part of the American Dream. The housing market collapse that began in 2007 has changed that view. Now many financial experts claim that renting is a better financial choice than owning a house. My experience is that homeownership over the long term contributes to financial security and independence in ways that renting cannot.

Some caveats: I realize there are those who cannot purchase a house for any number of reasons. If you cannot purchase a house, then you must rent. If you are planning to leave the area within seven years or if you cannot commit to remaining in the area at least seven years, you should rent.

Assuming you are able to purchase a house and are committed to remaining in the area for at least seven years, here are some of the reasons advocates for renting believe you should rent instead of buy:

  1. Cost. In many markets, monthly rent is equal to or less than a mortgage payment on an entry level house. Add in the maintenance costs of an owned house and renting is less expensive than owning.
  2. Flexibility. Renting allows you the flexibility to move to another area in search of employment if you lose your job, to move to a property with lower rent if you should encounter financial problems, and to relocate if the neighborhood becomes undesirable.
  3. Maintenance. Renting puts the burden of maintenance on the landlord, saving you time, headaches, and money.
  4. Opportunity cost. The downpayment required to purchase a house could be put to better use by investing in assets other than a personal residence.
  5. No tax deduction for homeownership. In the present low-interest mortgage environment, the average homeowner does not pay enough mortgage interest to take advantage of the mortgage interest deduction on her income taxes, thus making homeownership more expensive.

Here are the reasons I believe the purchase of a house is preferable to renting, over the long term, if you are able to purchase a house and are committed to remaining in the area for at least seven years:

  1. Cost. When costs for renting vs homeownership are compared, the rents are for apartments in large apartment complexes. A three-bedroom apartment is 1,000 to 1,100 square feet while a three-bedroom house is 1,500 to 2,000 square feet and up. Apartments might be less expensive, but they are also 33% to 50% smaller. Monthly fees for off-site storage are not included in the apartment cost calculations, either. Comparisons based on cost per square foot would probably tilt in favor of homeownership.
  2. Cost for shelter locked in. If you purchase a house and remain in it long term (I call it your stay-put house.), you lock in your costs for shelter for the rest of your life. Short term, rents and mortgage payments plus maintenance might be close, but long term, say twenty to thirty years down the road, mortgage payments plus maintenance for the stay put house are much less than rent. Rents keep going up, year after year. Assuming you finance with a fixed rate mortgage, your mortgage payments stay relatively level except for increases in property taxes and insurance premiums. Once the mortgage is retired, the cost to own your house is property taxes and insurance plus maintenance. I will use my house as an example: We purchased our three-bedroom, 1 1/2 bath house in 1985, assumed an 8.5% mortgage and had a house payment, including escrow, of $304 per month. We paid off the mortgage in 1989. Currently, that same house costs us $260 per month in property taxes and insurance plus $140 per month in average maintenance costs for a total cost of $400. A three-bedroom apartment rents for $975 per month in the city in which we live. A comparable three-bedroom house in our neighborhood rents for $ 1,200 per month.
  3. Financial security. Payments on the mortgage retire loan principal which builds equity in the property. Equity is a form of saving. Long term, owning a house enhances your financial security.
  4. Maintenance. Maintenance is not free for renters; it is computed into the rent. That is an incentive for the landlord to perform as little maintenance as possible. Renters may also have difficulty in getting a timely response to maintenance problems. A homeowner is responsible for maintenance of the property and must either do the work herself or hire it done. In either case, the homeowner has more control over the timeliness of the repair and the quality of the work. The primary objection to house maintenance is the cost. Costs can be reduced significantly if the owner is willing to do the work. Most routine maintenance can be done by the owner. When home maintenance is discussed the costs are always treated as an unexpected expense that can potentially bust the owner’s budget. The costs to maintain a house are not unexpected; they come with homeownership. If an owner budgets for home maintenance and sets aside a sum each month for the day when a maintenance expense occurs, she will have the money to pay the expense without breaking the budget. By planning for maintenance expenses in advance and doing routine home maintenance herself, a homeowner can enjoy a better quality of life than a renter.
  5. Quality of life. A homeowner is free to make alterations and improvements to her property that, over the long term, make it more suitable to the owner’s lifestyle. This enhances the enjoyment of time spent in and around the house.
  6. Permanence. Ownership of a stay put house provides a sense of permanence, of home.

The primary financial benefit of purchasing and owning a stay put house long term is the effect on the cost of shelter. Your cost of shelter remains relatively stable over the long term and considerably lower than rent on comparable accommodations. A relatively low and stable cost of shelter during your working years frees up more money for saving. As you approach retirement age, it makes it easier to retire and to live on a fixed income.

The element of security should not be overlooked, either. As we age, we feel more secure and comfortable in familiar surroundings. The stay put house does a much better job of providing this than does a rented apartment where uncertainties abound such as increased rents, change of ownership, or eviction due to a planned demolition of the property.

If you are ready to put down roots and make a long-term commitment to a location, then consider purchasing a modest, stay put house that suits your needs and plan on living there the rest of your life. Fifteen or twenty years down the road, you will be glad you did. Long-term homeownership is still a critical part of the American Dream.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Paying Off Your Credit Card Each Month Can Boost Your Credit Worthiness

It should be common sense that people who pay off their credit card balances each month are better credit risks that those who carry a balance, but that has not been reflected in traditional credit scoring.  Current formulas for calculating FICO scores do not distinguish between those who pay off their credit card balances each month and those who make timely payments but continue to carry a balance.  That may be changing soon due to the introduction of “trended credit data” which separates “transactors”, those who pay off their credit card balances each month, from “revolvers”, those who carry a balance on their credit cards.

The three major credit reporting companies, Equifax, Experian, and TransUnion began using trended credit data a few years ago and have found that differences in payment patterns can predict the likelihood of default.  A study by TransUnion discovered that revolvers defaulted three times more often than transactors on new credit cards and auto loans and five times more often on current credit cards.  The credit reporting companies are making this trended credit data available to lenders who are using it to determine credit worthiness, not only with regard to the extension of credit but to the types of credit offered and rates of interest charged.

Transactors are considered low-risk and when this is combined with other alternative non-credit data (checking accounts, address changes, and magazine subscriptions) it can boost a person who is considered to have a “non-prime” credit status using traditional credit scoring to “near prime” or “prime”.   Such an increase in a person’s credit rating has a huge, positive impact on the availability and cost of credit.

The major credit reporting companies now offer credit evaluation products that include not only trend credit data but alternative non-credit data, as well.  Experts in the field say it is only a matter of time before FICO scores reflect these additional factors.  At last, in addition to keeping your finances in order, paying off your credit card balance in full each month will garner the additional credit worthiness you deserve.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages