Financial Amnesia Can Hit You Hard

NEW YORK (MainStreet) — Making new financial resolutions and promises to pay off debt, spend less and save more money is common among many consumers as they kick off the new year.

The National Foundation for Credit Counseling (NFCC) said its December poll revealed that more than half of the respondents or 56% predicted they would be in a better place financially at this time next year. This response rate tripled the next highest category where 18% of respondents indicated their situation would remain about the same as it is this year.

"Financial optimism is a healthy sign, but it's going to take more than hope and more than a New Year's Resolution to make financial success a reality," said Gail Cunningham, spokesperson for the NFCC. "People need to guard against financial amnesia, the affliction of too quickly forgetting the financial mistakes and pain of the past."

Consumers should focus on establishing or maintaining a realistic and viable financial plan, she said.

"Although the future can't be predicted, consumers can protect themselves from financial unknowns by making smart money decisions today," Cunningham said.

Financial control should start with financial awareness. While New Year's resolutions typically involve getting out of debt; however, many consumers skip the basic step of creating a spending plan.

"It is rarely on anyone's list, as many people don't want to face the financial facts," she said. "Continuing to ignore current spending patterns can prevent a person from identifying and addressing the very reason that debt reduction is not achieved."

NFCC encourages consumers to take the first step toward debt reduction by building a 2014 financial plan, including the following often forgotten or ignored areas. The result will be a comprehensive and realistic budget, moving the goal of debt reduction closer to becoming a reality.

  • The unexpected. It's usually not the daily routine expenses that wreck people's budgets, but the emergencies. Prepare for these by socking away 10% of each paycheck into a rainy day fund. At the end of a year, it will total more than one month's income, enough to cover most short-term emergencies.
  • Long-term savings. Protect against serious set-backs such as job loss. Even though the unemployment numbers are improving, no one is immune to job loss. If the unthinkable happens, bridge money will be needed to help manage daily expenses and existing debt obligations. Without it, people frequently resort to living off of credit cards, often amassing an unmanageable amount of debt. Experts recommend having a minimum of six months' income as a cushion. Since it takes quite a while to build up this amount of money, now is the time to start saving toward this goal.
  • Known periodic expenses. Birthdays, anniversaries, holidays, vehicle tags and quarterly insurance premiums are examples of expenses that occur at the same time each year. In spite of being able to anticipate these expenses, many people neglect to set aside the money necessary to satisfy such events.
  • Household and vehicle maintenance. Things are going to break and usually at the worst possible time. Without a plan to cover the expense, people are left with poor resolution choices: take money from a higher priority such as the rent or mortgage, thus compromising that category; charge the expense and add to an already burdensome debt load; borrow from family or friends which is awkward and potentially puts the relationship at risk.
  • Travel. Whether it is a family vacation, an out-of-town funeral or wedding, or sporting events for the kids, traveling costs money. Try to anticipate as many of these events as possible, and work the cost into the budget.
  • Major purchases. Buying a home, purchasing a vehicle, remodeling the house or that long-awaited state-of-the-art entertainment, are examples of expenses that need to be considered and planned for.
  • Charitable giving. Being generous is a virtue. However, being generous to a fault isn't. Review previous giving patterns to estimate 2014 donations.
  • Health insurance choices. Recent changes will potentially have a major impact on a spending plan. In addition to medical insurance, account for anticipated dental and prescription drug needs in the budget.
  • Investing. Time is money's best friend, particularly for those with a long time horizon. Regular, disciplined investing is a critical part of long-term wealth building.
  • Debt reduction. Instead of allocating minimum monthly payments into the budget, set a date by which all current credit card debt will be eliminated. This step will free up money to go toward satisfying goals such as saving or investing.

"The likelihood of being in a better financial place at this time next year starts with the decisions we make now," continued Cunningham. "Although there are things outside of our control, planning today protects against tomorrow's uncertainties."

Consumers can learn more about managing their overall finances by visiting the Sharpen Your Financial Focus website, www.SharpenToday.org, or calling toll-free 855-3-SHARPEN (855-374-2773) to schedule an in-depth financial review with an NFCC Member Agency.

The NFCC December poll question and results are below:

At this time next year, I predict that my financial situation will be

  • A. Better = 56%
  • B. Worse = 17%
  • C. About the same = 18%
  • D. No idea, as the economy is too unstable for me to make a guess = 9%

Note: The NFCC's December Financial Literacy Opinion Index was conducted via the homepage of the NFCC website (www.DebtAdvice.org) from December 1–30, 2013, and was answered by 1,134 individuals.

Additional Mistakes

According to J. Clay Singleton, a professor at the Rollins College Crummer Graduate School of Business, a few specific pitfalls consumers face are inevitably in the credit card category.

 

  • 1. Mistake: Using the wrong credit card - Millennials who are new to being responsible for managing credit often overlook the terms and conditions – and especially the fees – associated with credit cards. Credit cards will help you buy something on sale when you don't have the cash but the interest charges and fees can quickly add up to cost more than the sale savings.

     

    Solution: If you get behind on your credit, stop using the card until the balance is completely paid. If you run into trouble a second time, cut up the card, close the account and get a debit card instead. Wise credit card use is essential to establishing credit.

  • 2. Mistake: Not checking your credit score - Although the practice is controversial, many prospective employers will run a credit report on all prospective employees.

     

    Solution: You can – and should – check your score to be sure it is accurate. If not, you must call and correct the error. Be prepared to provide documentation. Keep receipts for major payments and funnel payments through your bank account so you will have a record of prompt payment. Protecting your credit is essential.

  • 3. Mistake: Failing to recognize that credit card companies are eager for your business - You may find a card that charges no interest for the first six months. Thereafter the rate goes up, often to a higher rate than their competition.

     

    Solution: Just before the six months is up, call the company and tell the representative you are cancelling the card because the new rate is too high. Often the company will reduce the rate to keep your account. If they refuse, you can cancel or stop using the card. This strategy works with other credit accounts, too.

—Written by Ellen Chang for MainStreet

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