Gails Blog

I’m a big believer in optimism. One of my mantras is:

Plan like a pessimist so you can live like an optimist.

But being optimistic and being delusional are very different things. Making financial decisions based on what you hope will happen isn’t Optimism. It’s Wishful Thinking.

Did you buy a home with zero down? Did you transfer your debt to your home by refinancing and then keep your credit cards active? Did you take advantage of a buy-now-pay-later and then let it expire? Then YOU fall into the category of Wishful Thinker.

People who believe that were we are now is where we’re going to stay — that the crazy times would continue indefinitely and huge home value gains would eventually take care of whatever problems they created for themselves by using credit — are Wishful Thinkers. If they had taken the time to consider that what we were experiencing with the rising home values wasn’t “normal”, they might not have been suckered into believing they could have it all at once.

Investing is another world in which Wishful Thinking does us no good. Chasing hot performers is how Wishful Thinkers end up losing lots of money.  

Did you know that people are actually hardwired to over-react to recent events? This works if you’re a forager. If you’re looking for food the best place to look is where an animal was yesterday. But the economy is a different kettle of fish and no matter how often you hear that the markets are rationale, they are not.  

Despite dire warnings not to do so, we continue to use our forager brains to consider what will happen next in the economy. No matter how much the experts talk about market cycles, investors cling to the idea, ill formed, that wherever we are today in the markets, that’s where we’ll stay. So if we’re in a rising market, the market will continue to soar, and as we have experience most recently, a downturn in the cycle can make people run screaming for the exits.

Wishful Thinkers also think that bad things can’t happen to good people. But they can. And they do. From divorce to illness, from job loss to creditors calling loans, there’s a lot of room for disaster. Even the little things like increases in gas costs, food costs, interest costs, can add up to a big fall, especially when your pay cheque hasn’t grown much.  So if rising costs are pushing you further into debt because now you’re using your credit cards or lines of credit to buy food, just know that you got there because of your Wishful Thinking.  Had you set aside some money for an emergency, instead of always believing There Will Be More Money, you would have found it a lot easier to deal with life’s curveballs.

Perhaps the Wishful Thinking I am most impatient with comes from the people who believe it’s okay to spend money they haven’t yet earned. People, if you can’t afford it today, it’s just going to be worse tomorrow when you add on the interest. Buying anything on credit when you know you won’t be able to pay the bill in full at the end of the month means you think that you will be able to afford to pay the bill later. More Wishful Thinking. 

We’re in a pickle. We aren’t saving enough and we’re carrying record levels of debt. Not just mortgage debt, though many of us have more than we can manage in terms of mortgage payments. Noooo. We’re carrying record levels of debt on our lines of credit, our credit cards, and the plain-ol’-boring loans. Why? Simple. We’ve forgotten how to live within our means. We’re ricocheting out of control, spending money we’ve yet to earn. We’re buying STUFF we think we NEED, when all we’re doing, really, is scratching our consumer-itch. I mean to say, do you really NEED a TV? Do you really NEED another pair of pants? Do you really NEED that better-than-ever cell phone, camera or power saw?

The fact that we can’t seem to get to the end of the month before we get to the end of the money should be our first clue. Here’s what I mean:

GA writes:

We have a $50,000 line of credit as well as $45,000 in credit card and personal loans. We have a child starting college in Sept, another following in 2 years and a 2 year old. I have tried to trim our budget but can find no leeway. Grocery seems to be the biggest budget buster. We have cut eating out to once or twice a month but still have to reach for our credit cards by the end of the month. Any ideas where I should look to trim the fat and how do I cut back on the grocery bill? It seems the costs are up every time I go to the store.

Here’s a frustrated soul who can’t figure out how to cope with rising food costs because there is no wiggle room in her monthly spending. With $95,000 in debt, a minimum repayment amount of just 3% would mean a monthly payment of $2,850 a month. OMG! I’m sorry, GA, but FOOD is not your biggest budget buster; debt repayment is.

And that’s exactly the problem so many people are facing. They can’t figure out how to repay the money they have borrowed and have a life at the same time. Not surprising, really. You’ve already spent $95,000 you haven’t yet earned (and that would be after tax dollars, I’d like to point out).

So what other clues might there be that you’re living beyond your means?

Are you saving less than 10% of your net income? Yes. Then you’re living beyond your means. You see, if someone in your family were to have a medical emergency or a blip in their employment, if your roof were to leak or your car give up the ghost, if you should have to cope with a major move, the care of an aging relative, or educational expenses, you’d be up a creek without a paddle. Right GA?  Ideally, you should save as much as you can, with 10% of your income being a guide. If you are a member of a company pension plan, that counts as savings. If you’re having money deducted automatically for bonds, that counts too. 

Are the balances on your credit cards or lines of credit rising? Yes. Then you’re living beyond your means. Paying only the minimum on your credit cards or lines of credit while you continue to increase the balance you owe is a sure sign you’re a dope. When, exactly, are you going to have the money to finally get rid of the debt? Is some magical wand-waving fairy god mother going to pop into your world and woosh away your debt? Or do you figure that a windfall is in your future? Hey, WAKE UP! If you have a $5,000 credit card balance at 18.9% and make a minimum payment of just 2.5% per month, you’ll end up forking over almost $8,000 in interest over the 25 years it takes you to pay off the balance.

GA owes $95,000. Let’s say she’s averaging an interest rate of just 11%. And let’s say she makes a payment of $2850 a month (ouch!) It’ll cost her almost $19,000 in interest and take 40 months to pay off the debt. Over-extended? I guess so.

Are you missing payments on bills? This is a sure way to ruin your credit rating and increase your interest costs. And it’s a sure sign you’re living beyond your means. If you don’t have a handle on what your monthly bills are, and what it’ll take in income to keep current, then it’s time to get with the program. Get out all the bills that have to be paid every month and make a list. Rank the bills in order of priority. You HAVE to pay your electricity bill, but you don’t HAVE to have premium cable (or any cable for that matter.) Okay, now deduct your HAVE TO PAY amounts from your monthly income in order of importance. When you run out of money, cancel everything else.

Are you taking cash advances on your credit cards? Yes. Then you’re living beyond your means. Cash advances, putting your groceries on credit, applying for new cards and transferring balances so you can fool yourself into thinking you’re paying your debt are all signs that you’re in BIG TROUBLE.

I know it’s easy to get credit. I know it’s nice to have what you want when you want it. And I know everyone else is doing it. But just because they’re all walking off the edge of the precipice doesn’t mean you should follow them. And if you’ve been walking in lock-step with a bunch of fools who can’t control their spending to the point that they put themselves and their families at risk, then it’s time to change your pace.

You don’t have to be a follower. You don’t have to continue to do what all the other dopes are doing. You can stop the insanity, take control of your future, and commit to living within your means. I know you can. Do you know you can?