What a great question to know the answer to BEFORE you buy a house! One of my favorite sites that has some great resources to learn about money and finances is NERD WALLET.com.
Here's the link to their webpage where you can enter your basic information regarding your income and finances and it will tell you how much house you can afford. CLICK HERE
Here's another popular question I get about working with families who have almost insurmountable debt, "Victor, how do they accumulate that much debt?" It's a good question, but an even better question would be, "How do they allow the debt to keep growing?"
People go into debt and eventually file for bankruptcy usually because (1) Medical emergency that took their life savings (2) Change in marital status like becoming a widow or divorce (3) Became disabled and unable to work full time (4) Started a business and it went under (5) Student loans (6) Lost you job and so on.
But what about those who experience none of the above and are living with debt and in some cases adding to it; why? In other words, "How do they allow the debt to keep growing?" I believe one explanation is what psychologist call the "Mere Exposure" effect. The simplest explanation is when we are exposed to something repeatedly our fear center gets use to it to the point where it no longer fears it (i.e., no longer scares us). We come anesthetized (numb) to it!
Imagine for a moment I put a small tiger into your house. At first you would be scared, horrified and paralyzed. A week later, after realizing that the tiger wasn't going to eat you, you got use to the tiger but were still somewhat leery of it. A year goes by and you don't even fear or see the MUCH BIGGER tiger anymore. In fact, you're so use to its presence you even feed it by hand.
The tiger is much like the total debt people have. Initially they're horrified by what it might do to their credit report, ability to borrow money, their family and their ability to survive. But over time, when they aren't 'eaten' by their debt, they get use to it. They see the bills every month (mere exposure effect) and just put them to the side. They learn to live with the presence of the debt (tiger). Once they get use the debt, they eventually start adding to it (feeding the debt) since they're no longer afraid of it.
One couple I worked with actually put their bills in a box in the basement as if that would make it go away or disappear. I'm not making this up! This is equivalent to putting the tiger in the basement hoping it won't get bigger and just go away!
You may be thinking, "But why don't they just take control (i.e., kick the tiger out)? Why can't they stop adding to their debt" Good questions! I'll cover those in my next post!
The brain is an energy miser! What does that mean? It does what it can to conserve energy. Although the brain is 2% of your body weight it can consume up to 20% of your energy. The brain is always looking to conserve energy by NOT having to think. The more you can put the brain on AUTO PILOT, the less energy it uses up.
What does this have to do with YOUR finances? Think about it for a minute! If you are constantly having to worry about money, the brain is using up a lot of energy to keep up with all that's going on financially. But what if you automated your bill payments? What if you setup, through your (online) bank, a way where all you have to do is deposit your check and the system would take care of making sure your credit card bill, student loan, auto loan and monthly mortgage got paid on time.
By automating your payments you are now working with the brain's natural tendency to want to SIMPLIFY and conserve energy, This would FREE you up (your brain) from having to constantly worry and remind yourself to make the payments on time. That free time can be used to focus on others things that warrant your attention (i.e., taking care of the kids, looking for a new job, etc).
Have you made mistakes regarding your credit in the past? That could haunt you ... for a long time. A whopping 68 percent of Americans make at least one major financial mistake, or "credit fumble," before turning 30, leading to a negative mark on their credit report, according to a Credit Karma survey.
These mistakes include overspending on credit cards, missing payments, defaulting on a loan or having an account sent into collections, the survey found.
The greater the offense, the longer it will reflect on your credit report, said Bethy Hardeman, chief consumer advocate at Credit Karma. In fact, it usually takes consumers seven to 10 years to erase negative marks from their credit, thanks to the Fair Credit Reporting Act.
"I think what a lot of people don't realize ... is how a missed payment can stay on your credit," Hardeman said. "It can be one mistake that you don't think is a big deal that can cost you thousands in the long run."
Credit is an important factor in determining what kind of loans consumers receive, as well as whether they are approved for an apartment lease, Hardeman added.
The survey, released Thursday, found that 3 out of 4 respondents believed their credit-related mishaps have had a negative impact on their lives. "These early mistakes can have a lingering impact on the quality of people's lives, and we feel that with better, targeted education and learning tools for new-to-credit consumers, this cycle can be broken," Kenneth Lin, Credit Karma's founder and CEO, said in a statement. There are many reasons why someone may end up with a negative mark on their credit history, but the biggest one is lack of education, Credit Karma found.
More than 50 percent of respondents said they had received their first credit card by age 21, but 72 percent said they had received no education about personal finances before going to college. Hardeman said consumers should know "the long-term ramifications before you take out a credit card or take out a loan." Consumers also need to understand how their overall credit works, said Sean McQuay, credit cards expert at NerdWallet.
"Your credit shows how good you are at managing other people's money, not your own," he said.
One way consumers can regain proper footing on their credit is by applying for a secured credit card, McQuay said. "This gives you a chance to prove yourself ... and over time, you can apply for more traditional credit cards."
Secured credit cards work just like any other credit card. The only difference is the cardholder has to put up a certain amount of money as collateral, and his or her credit line will usually equal the collateral's amount.
However, McQuay also said the consumer needs to be mindful of the risks involved with secure credit cards.
You need to have the cash on hand," he said. "Even $100 can be a lot of money for someone to just give over."
For the study, Credit Karma and research firm Qualtrics surveyed 1,051 American adults ages 31 to 44 from late November 2014 to early 2015.
Survey: 68% of Americans destroy credit before age 30
Fred Imbert | @foimbert
"Victor, how do these families get into that much debt?" is the question I often get asked most when working with families who are financially unstable.
It's simple question but the answer is far from simple. Each family I work with has their own set of issues (yes that's plural on purpose).
After having worked with so many families I realized that their money problems are a 'manifestation' of dysfunction:
I could go on but you get the point. In upcoming posts I'm going to go further into the "Psychology of Debt" or better yet, "Mindset of Broke".
Financial Stability is not ONLY about cutting costs! It's also about finding what you're good and being the best at it. When you do and when you are, people will pay you what your worth! Be the best at what you do! #VictorAntonio
Our school system does a poor job of teaching financial literacy! Educate yourself. #VictorAntonio
Getting ready to speak to the Moneris Corporation about business, money and adapting to change in order to survive in this changing economy.
People keep asking about good money books to read; There are many, here's my first share. Ramit Sethi #victorantonio
The greatest reward when working with couples, a family, is watching THEM turn it around! #victorantonio