Monday, March 26, 2007

Reality 101

This particular entry is probably going to come across as insulting and condescending but if you need this lesson I don't think there's anyway to get around that.

Reality is the way things actually are. Now, oftentimes the way things are have absolutely nothing to do with the way you want them to be. Let me repeat. Oftentimes the way things are have absolutely nothing to do with the way you want them to be.

For example: Some people, for ease of remembering and managing, want to pay all of their bills at one time during the month. There is some appeal to this approach. You're more likely to remember to pay your bills if you only have to remember one due date. However, most of your bills don't come at one time during the month. Yes, some companies allow you to say whether you want your bills due at the beginning, middle, or end of the month, but not all do. And some companies define these dates differently. One company may consider the beginning of the month the 1st of the month, some might consider it the first week of the month. Either way, it is very, very hard to get all your bills sent to you, much less due, at the same time each month.

The problem is, some people won't accept this reality. They think that just because they want all their bills due at one time in a month, they can get away with paying their bills that one time of the month. So that's what they do. They pay all their bills on the same day each month. What ends up happening? At least one bill is late every month. The company starts adding late fees to their bills, and that person ends up paying more each month. The lates start to add up and the company reports the lates to a credit reporting company and the person's credit score gets dinged and goes down. The more lates, the more reports to the credit companies, the lower the score.

Now, this doesn't just affect that individual. Let's say one of the bills paid late due to this system is the person's home loan. Let's say that individual went through a broker to obtain their home loan. Well, four months of late payments later the lender gets fed up because servicing the loan is becoming too time consuming and expensive and they can't sell the loan because no one will buy the loan of a person who can't pay on time. What does the lender do? They call up the broker and demand the broker do something about it. The broker now has to spend money and man-hours trying to get the borrower to do what they're supposed to: pay on time. The borrower, not accepting reality, refuses. Now the lender gets annoyed and forces the broker to buy back the loan. The broker has to come up with the cash to buy that loan. Now they're stuck with a bad loan that they can't sell and that they may not be able to service and they're out what may be vital operating funds. Obviously, this is a relatively extreme case, but it is one that is fast becoming common. One has only to look in any finance publication to see just how bad the housing and loans industry is becoming.

Reality is you have to pay your bills when they're due, regardless of what date that may be so that's what you should do. No matter how much you may not like it. No matter how much it may disrupt your "system." If you have a financial planner/manager and they tell you otherwise, you should consider looking for a different financial manager.

Another common failure to grasp reality is in regards to credit cards. Reality is that just because your credit card has a credit limit of $10,000 it doesn't mean you can afford to spend $10,000 a month. But, apparently people see their credit limit as a statement of financial means or a challenge to be met. It's not. Unless your credit limit is very small, you should very rarely get close to hitting it. Remember the Financial Golden Rule: If you can't afford it, don't buy it. And just because you want it, doesn't mean you can afford it.

So, please, please, keep a firm grasp of reality when considering your financial self. This doesn't mean you can't have or pursue financial dreams. But it does mean you should understand what you may encounter during your endeavors. It means you need to understand that things probably won't go according to your plans. It means that if something happens, even if it isn't what you wanted or doesn't occur at the time you wanted, you still have to deal with it at that time.

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