Over the years, I have met hundreds of people with money problems. They usually contact me when their finances are in utter shambles. At some point a creditor may have threatened to file suit to collect a debt and they need professional help. So, forced to deal with the possible loss of a house or car, they call me.
After working in this field for many years I have a checklist that I run through:
- What are your assets?
- What are your debts?
- Married? Kids?
- Yearly Income and sources of income?
- Monthly total expenses?
- Monthly total expenses?
- Pending lawsuits? Other collection actions, such as repossession, pending?
- Have you filed bankruptcy before?
This is the easy part. Then, I have to go a little deeper.
Why are you having trouble meeting the debt payments?
Loss of job? Divorce? Health issues? Other?
However, the answer only leads to more questions. The big one is.
Why would you keep spending when you don’t have the money?
Usually, I don’t ask this one, at least not right away. The client must feel comfortable with me before I go into the underlying causes of their financial distress. It’s too personal.
I have a spreadsheet and I load all the data in that and look to see what can be done to adjust the client’s budget. I then review what has to be paid and jettison all the other bills. Usually, it’s pretty obvious and most people have done a mental calculation. They have reached the point where they give up trying to pay the credit cards. They are here to save the house or car. Most importantly, they want the collections calls to stop. The answer is usually pretty clear and logical, stop spending more than you earn and either file bankruptcy to eliminate the debt, negotiate with creditors to repay the debt or ignore the debt at your peril.
So why do people keep spending when it’s clear they are in debt up to their eyeballs?
Bad timing: There are people that have unfortunate circumstances that befall them and they do not have the time to deal with the debt. They include medical conditions that they must treat and go into debt to do so. There are people who have lost a job or gone through a divorce. These people were not able to adjust their spending or increase their income in time to deal with the debt.
It’s emotional: Some people are meeting an emotional need by spending more than they earn. They are sacrificing their financial health for something else. It may be that they are driven to live a higher lifestyle than they can afford in order to look good to friends, family or the spouse.
Some feel emotionally satisfied by giving to others. I have seen grandparents that overspend so that their grandchildren have whatever they want despite the debt piling up. I have seen people in transactional relationships where they feel they have to buy the affection of another through gifts or money.
Legalized Gambling: Some tried their hand at a business and it did not work.
Addictions: Gambling, alcohol and drugs. These problems are harder to fix and cause financial difficulties.
What most who lose control of their finances share in common is that they failed to realize that they were in danger and that they failed to take action to get themselves out of danger even when it was obvious that they were in danger. How can this be?
Amateurs: Most people were not trained to run finances. They do not use a budget. They go by feel. Most of the time this works until something changes. Bad luck or long running emotional issues as outlined above.
Live your life on purpose by having a plan: In order to avoid a repeat performance of the financial crash and burn, I think it is important to do a lessons-learned. You probably knew the answers if you just would have taken an objective/logical approach way back when. I believe the answers involve:
- Building a rainy-day fund and keep growing it, forever. Start with $1 and keep growing it until you have at least 6-months’ worth of living expenses. Then after you banked this amount, start investing in mutual funds. Get an advisor and keep making contributions each month. Forever.
- Paying off the credit cards each month. Period. If you can’t, then you are overspending. Use your rainy-day fund to pay off the cards and back off the spending.
- Being humble and do whatever it takes (legally) to keep earning money. Take the job driving for Uber if you have to until a better opportunity appears.
- Stop making excuses for failing to pay the monthly debts. You owe it to yourself and those that depend on you to be as strong and honest as you can be.
- Setting a deadline to become solvent if you start a business, (some say 3 years is a good time frame). If it does not make money by then, then pull the plug and work on your next big idea. Make sure you can handle losses for the time frame that you have chosen.
- Creating a budget and sticking with it. However, most people don’t do this. I find it’s easier to just save a certain amount each month and pay the mortgage and other fixed costs first. Then the reminder is for me to spend as I want to.
We all run into tough times. However, do we plan for the tough times? In the end, I believe if you let logic rule your emotions (which really means having a financial plan and sticking with it) then you won’t have to visit me when the tough times visit you.