How to Spot Your Family and Friends' Financial Troubles
I'm proud of my audience. I really am. Since becoming a regular reader of my posts, I'm sure you've long-since retired and are enjoying the fruits of your pre-retirement frugality on a secluded beach in the Caribbean or on your 40-ft yacht (for which you paid cash, of course). I'm thrilled that you've achieved financial independence, so today I'm going to reward you with a day off and a break from lending advice on your finances.
Now don't get me wrong -- I'm not going to stop talking about finances. But today, instead of talking about yours, I am going to talk about those of your friends and family and how to spot a problem. I'm going to talk about clues: those that indicate current trouble and those that indicate a future fiasco. The way I see it, family and friends are supposed to help each other through hard times and support each other during painful periods. For many, personal finance is a private subject that offers very little transparency for outsiders. Many times you can't detect problems with your eyes, your ears, and your nose, as you can easily do when it comes to identifying substance abuse. Instead, you will rely on your gut -- playing detective and piecing together the clues to support your argument that a problem -- or even crisis -- really exists.
Before you consider whether or not a friend of yours is having financial problems, you'll need to have an original suspicion; we can't investigate and confront everyone (like the nosy neighbor Martha Huber on Desperate Housewives). Many reasonable suspicions will come from a passing statement about credit card debt, the infrequency of pay days, the inability to pay a bill, the inability to save, or something else. Let's look at a few potential flag statements:
So why do people get into financial trouble? Clearly, some are presented with circumstances which are out of their control, like a sudden illness or a layoff in a poor economy. But some get into trouble for other reasons. Here's my theory:
Have you ever heard the principle that a liar will begin to believe his own lies if he tells them enough? Eventually, his lies can be spouted off without guilt or remorse. I think the same concept can be applied to those with preventable financial troubles. The snowball will start to roll when the person initially buys something which he cannot afford. He'll lie to himself about the item's affordability, being well aware that he should walk away and abandon the need for instant gratification. "Oh, it's just a lousy TV. I can afford it," knowing deep down that it's not a good idea. Later, when presented with another opportunity to spend unwisely, the same person will more easily convince himself of the affordability of said unwise purchase, despite contrasting evidence. Eventually, when it's told enough, the lie of affordability becomes second nature and is no longer is perceived as a lie; and that's when it becomes dangerous.
Do you remember the first cigarette you ever smoked and how horrifying that first puff was? It was awful and bitter and burning and easily sworn off. But the second one was a bit more tolerable. And the third became somewhat enjoyable. Over time, you developed a habit and never looked back at how terrible that first drag was. On day one, your body was trying to tell you something. You knew it was bad for your health, but you found a reason to do it anyway, probably related to high school popularity (keeping up with the Jonses) or the relief of stress (instant gratification). Whatever cookie-cutter excuse you came up with on that first day, you used it again and again until you didn't need to excuse yourself any longer. Non-smokers, please forgive this example, but I hope you get my point.
I certainly don't condone sniffing into the business of others. Personal finance is often a taboo subject among friends and family and a confrontation can affect a person's sense of independence and pride. However, depending on the situation, financial troubles on their part may result in a bailout on your part. Depending on the size and nature of the debt, what was once their problem may eventually become your problem. The way I see it, family money is family money. The benefits and the detriments to one member most certainly have the ability to benefit or detriment another. In other words, though it may not be your business today, it may become your business tomorrow.
I welcome anonymous comments about the financial stuggles of your friends and family.
Now don't get me wrong -- I'm not going to stop talking about finances. But today, instead of talking about yours, I am going to talk about those of your friends and family and how to spot a problem. I'm going to talk about clues: those that indicate current trouble and those that indicate a future fiasco. The way I see it, family and friends are supposed to help each other through hard times and support each other during painful periods. For many, personal finance is a private subject that offers very little transparency for outsiders. Many times you can't detect problems with your eyes, your ears, and your nose, as you can easily do when it comes to identifying substance abuse. Instead, you will rely on your gut -- playing detective and piecing together the clues to support your argument that a problem -- or even crisis -- really exists.
Before you consider whether or not a friend of yours is having financial problems, you'll need to have an original suspicion; we can't investigate and confront everyone (like the nosy neighbor Martha Huber on Desperate Housewives). Many reasonable suspicions will come from a passing statement about credit card debt, the infrequency of pay days, the inability to pay a bill, the inability to save, or something else. Let's look at a few potential flag statements:
- "I have no idea how much credit card debt we have."
Your friend's lack of knowledge of the amount of his credit card debt indicates a detachment from his own finances. Though his personal finances are private and he is unlikely to share his net worth with others, his own accurate view into them is absolutely critical to his financial wellbeing. - "I'm just paying the minimums."
This statement indicates an inability to sacrifice when repaying debt and/or a fundamental misunderstanding of the nature of revolving debt. As I proved in a previous post (the Cost of Credit Card Debt), paying the minimum on a credit card is about the worst financial decision one can make, second only to taking out a payday loan or using cash as kindling. If your friends are paying only the minimums on their credit cards -- especially if they continue to eat out and spend on non-essentials -- it shows that they are in denial of their situation and are likely in need of a friendly nudge to get the ball of debt reduction rolling. - "Thank god that my spouse and I are paid on alternating weeks."
Living paycheck to paycheck is part of being young. When I first graduated from college, it was important for me to analyze my paydays and sync them with my bills' due dates. But as I got older and was able to save a little more, I eventually got to the point where I had an amount equal to one paycheck sitting in my checking account. Once I hit this milestone, life became easier because I didn't need to strategize the days on which I paid my bills. But when you see friends and family in their 40s or 50s worrying about which day of the month they're getting paid, it can indicate a paycheck-to-paycheck lifestyle and therefore, a lack of savings (or at least liquid savings). Assuming he has a moderate salary, that lack of savings might come from excessive minimum payments on loans and credit cards or from current overspending. Additionally, this indicates that your friend struggles with budgeting and planning for expenses that fall far away from payday.
So why do people get into financial trouble? Clearly, some are presented with circumstances which are out of their control, like a sudden illness or a layoff in a poor economy. But some get into trouble for other reasons. Here's my theory:
Have you ever heard the principle that a liar will begin to believe his own lies if he tells them enough? Eventually, his lies can be spouted off without guilt or remorse. I think the same concept can be applied to those with preventable financial troubles. The snowball will start to roll when the person initially buys something which he cannot afford. He'll lie to himself about the item's affordability, being well aware that he should walk away and abandon the need for instant gratification. "Oh, it's just a lousy TV. I can afford it," knowing deep down that it's not a good idea. Later, when presented with another opportunity to spend unwisely, the same person will more easily convince himself of the affordability of said unwise purchase, despite contrasting evidence. Eventually, when it's told enough, the lie of affordability becomes second nature and is no longer is perceived as a lie; and that's when it becomes dangerous.
Do you remember the first cigarette you ever smoked and how horrifying that first puff was? It was awful and bitter and burning and easily sworn off. But the second one was a bit more tolerable. And the third became somewhat enjoyable. Over time, you developed a habit and never looked back at how terrible that first drag was. On day one, your body was trying to tell you something. You knew it was bad for your health, but you found a reason to do it anyway, probably related to high school popularity (keeping up with the Jonses) or the relief of stress (instant gratification). Whatever cookie-cutter excuse you came up with on that first day, you used it again and again until you didn't need to excuse yourself any longer. Non-smokers, please forgive this example, but I hope you get my point.
I certainly don't condone sniffing into the business of others. Personal finance is often a taboo subject among friends and family and a confrontation can affect a person's sense of independence and pride. However, depending on the situation, financial troubles on their part may result in a bailout on your part. Depending on the size and nature of the debt, what was once their problem may eventually become your problem. The way I see it, family money is family money. The benefits and the detriments to one member most certainly have the ability to benefit or detriment another. In other words, though it may not be your business today, it may become your business tomorrow.
I welcome anonymous comments about the financial stuggles of your friends and family.
Labels: clues, difficulty, family, financial health, financial planning, friends, help, personal finance, problem, struggle, trouble
posted by Scott Bliss @ 6:19 AM
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