Avoid Financial Doom with Some Simple Financial Wisdom
Last week our friends over at Kasasa were kind enough to send us tickets to see The Big Short, a movie which, for those of you who may not know, is centered around the financial crisis of 2007.
Brought on by a combination of exploitative lending practices in the housing market, numerous conflicts of interest in our financial regulation systems, and immense greed, the crisis is widely considered to be the worst of its kind since the Great Depression. While immensely entertaining, the film does offer some serious food for thought and left us wondering how a scenario like this could have been avoided.
There have been numerous articles written in an attempt to answer this very question, the vast majority of which approach the situation from a political or economical perspective. While that’s all well and good and definitely worth discussing, we couldn’t help but think that there was also a more practical approach, one that could be taken on the individual level. Is it possible, perhaps, that if people possessed a greater sense of financial wherewithal that they could’ve realized the mortgages they were approved for were well outside of their budget? That they were, in fact, doomed to fail from the start?
We can’t say for certain, but these thoughts did serve to reinforce the importance of financial literacy in our minds. While it’s vital to ensure our financial systems aren’t corrupt or exploitative, it’s also important to empower the everyday consumer to understand their finances and know how to make the best decision for themselves. So, with that in mind, we feel encouraged to share some critical pieces of financial wisdom. Hopefully, with the right knowledge, you can diminish the chances that you’ll fall victim to an unsustainable loan, investment, or any other financial endeavor.
“You’re Approved” Isn’t the Same as “You Can Afford”
Just because a bank or financial lender approves you for a loan doesn’t mean you can afford it. As we mentioned before, one of the major causes leading to the financial crisis was the frivolous nature with which lenders were handing out mortgages. While it might be exciting to be offered a large loan, it’s important to curb your enthusiasm and really take the time to determine how much it’s going to cost you. Just because a bank or financial lender approves you for a loan, that doesn’t necessarily mean that you can afford it.
Just because a bank or financial lender approves you for a loan, that doesn’t necessarily mean that you can afford it.
When applying for a loan it’s important to understand the the loan’s interest rate, the length of the repayment period, and what your minimum monthly payment will be. Knowing these things before signing off on the dotted line can help you figure out whether or not the loan really works within your budget.
Make Sure You Know The Big 5
How much money is coming in, how much money you have going out, how much money you owe, how much money you have saved up, and your net worth. We won’t get into the nitty-gritty here (if you want an in-depth explanation, Leslie gives an amazing explanation here) but these are essentially the pillars to personal finance. Understanding these five numbers can give you a cohesive, well-rounded overview of your financial situation and can make it easier for you to diagnose financial problems.
For example, let’s take a look at how much money you have going out or, more simply put, your expenses. Knowing how much money you spend every month, and where that money is going, can help you better optimize your spending habits, discover savings opportunities, and keep you on track for your savings goals.
Repeat After Me: Credit is NOT the same as Cash
Paying for something via credit is not the same as paying for something with cash. Despite the end result being the same (you being in the possession of a particular item), the journey you take to get there is completely different. Paying with cash starts and stops at the point of the transaction; money and item change hands and that’s the end of the story. With credit however, that transaction could take months, even years to resolve.
So, before relying on your credit card or applying for a loan to get the thing you need, it’s important to ask yourself: “Is this the best way to pay for this?”. This brief moment of reflection could wind up saving you a TON of money and keeping you from falling into debt.
You Take the Good Debt, You Take the Bad Debt…
…and then you have the facts of finance. Yes, while it might seem crazy, there is such a thing as “good” debt. You see, debt gets a bit of a bad rap because it doesn’t take a lot of it to throw your financial stability completely out of whack. That said, there are types of debt that are beneficial to not only your financial wellbeing, but your life as a whole.
Let’s take another look at mortgages. Unless you’re some sort of oil baron or technological savant, you probably don’t have hundreds of thousands of dollars laying around to just outright buy a house. Providing you know your financial limitations, have a solid credit score, and fully understand the responsibilities (see financial wisdom tidbit number one) surrounding your mortgage, you should be able to take on a manageable loan and get the home you need.
While we can only hope we’ll never be faced with the same predatory practices leading up to the financial crises of 2007, we can always better educate ourselves to help diminish the chance we fall victim to them. Do you have any pieces of financial wisdom that you feel are worth sharing? Let us know in the comments!
This blog was written in partnership with Kasasa. Written by Sean Stevens, with input from Leslie Tayne and Jackie LePage.