There are more financial products out there than there are players in professional baseball. Many are good for our financial lives but some are bad.
The following products cause a false sense of security, zap money from our cashflow, or rob us of the ability to take care of ourselves. Instead of financial products that derail us on our journey to wealth we should be thinking about buying into mutual funds, saving accounts, paid for real estate, and other things that increase our net worth and don’t keep us middle class.
“90 days same as cash” is one of the common advertising lines from furniture and electronic stores. Clever financing options are designed to get you in the door, dangle the carrot in front of you, and close the sale by getting you to sign a contract that will convert into back-charged interest if not paid off by a certain date. I learned that if I could get the money together in 90 days, why wouldn’t I wait 3 months and pay cash?
The most expensive thing we buy other than a house is a vehicle. Gasoline, oil changes, and new tires increase the convenience of our freedom to hit the road whenever we want but also impact our wallet. Pack on the top of that a car payment and you will see an incredible amount of your monthly budget being eaten up by transportation. A $20,000 car financed at 3.99% for 60 months will charge you about $2,500 in interest.
You may not have started out in the Middle Class and hopefully your are making a good living in your choice of career. Even with a good income you are more likely to remain in the middle class when a chunk of your monthly cash-flow is used to make payments for a degree earned years ago. If you have student loans then it would behove you to have them paid off early to free up money to purchase other financial products like saving accounts or mutual funds.
Taking unrealistic chances for riches has never been a good financial plan. The chances of hitting the right numbers for the Mega-Million are 1 in 175,000,000. That’s not a very promising statistic. I took my budgeted lottery money and spent it on something else – my Roth IRA. The statistic are really good that I will become a millionaire before I retire. I did the math.
Kind of like the lottery but without the possibility of a windfall – a sense that eventually the money will come in and everything will be OK. People are more at ease about saving for their own retirement because we believe Social Security will be there if we don’t have enough. Examine the Social Security statement you receive in the mail and consider how much the expected $1,900 or so will be worth when you reach age 65. Not much.
Too big of a house
There is an argument for renting over buying: Monthly rent is usually cheaper than having mortgage payment of the same amount because a renter doesn’t have to deal with repairing appliances, replacing a roof, or paying a plumber to fix a leaky pipe. However, paid-for real estate is a great line item on any net worth statement. What can keep someone in the middle class is a house that is too big for their monthly budget. A good rule of thumb is to have a house payment that is no more than 25% of take-home pay, or 30-32% if taxes and insurance (escrow) is included. Anything more than that makes paying saving for retirement, college, even vacation much more difficult. It could greatly slow down building net worth.
When was the last time YOU used your credit score? Never. The bank may have checked your score or an insurance agent but consumers do not use their scores. Credit score lending is a quick and easy way to evaluate your credit worthiness and determine the amount of money or the interest rate they will lend you. It’s a loan officer’s job to lend money, so you’re already “in” when you walk in the door. So a credit score can qualify you for a good rate or DISQUALIFY YOU FROM THE BEST RATE. Don’t waste your time building a credit score – keep your credit REPORT clean, stop borrowing money, close all credit card accounts and get your score to zero. That’s the only way your savings, investments, and net worth will be used to evaluate you for a mortgage or refinance (the only type of debt that I find acceptable, unless you fall into #6).
The reasons credit cards keep the middle class in the middle class is partially the amount of interest paid and any fees involved, but I feel there is an even bigger problem with keeping a card around: A false sense of security. So many people have fallen for the lie that a credit card is great for emergencies. The flaw in that line of logic is that by using a credit card in an emergency creates another emergency because 30 days later you don’t have the money to pay the debt. If you had the money then why would you need a credit card?
Instead of financial products that cause false promises
The path to becoming wealthy is to save, invest, and live on less than we make. Using other people’s money is expensive and is eroding our ability to become financially independent.
What to do next
Check off which of these financial products you have and think really hard about why you keep them around.
Avoid debt and cut up some credit cards while you are at it.
It sounds scary, but you can always find a bank or retail store that will give you a free credit card if you change your mind about it.