Monday, September 29, 2008

Watch the spending more than the making

I’m sitting here watching CNN talk about the economic crisis our country is just beginning to deal with. The 700 billion dollar bailout has not received the votes and the country’s economic future is completely unknown.

Do I have answers? Absolutely not. But I do realize the significance of how important the message I’m trying to relay is to each individual’s economic survival – pay attention to what you spend more than what you make.

This country’s economic philosophy over the last 20 – 30 years has been based on borrowing to buy what you can’t afford. As long as you have assets, income, money – everything will be okay. In the midst of all the debt accumulation, most people I meet can’t tell me how much money they spend to live. However, they are very clear on how much they make, and if money’s tight they feel like the answer is to focus on making more money.

Let’s look at the loans we give out to the average American. Let’s forget about sub-prime mortgages. When we give out a credit card or a car loan or a mortgage, what questions do the banks ask? When my husband and I borrowed money to buy our house, they asked us about our income, and they asked for proof. They also asked about our other assets. They looked to see if we had debt on our credit report, and that was it. It was left up to me to determine how much I spend on groceries, car maintenance, child care and Christmas gifts. And that’s where a lot of our money goes! Banks need to ask those same questions.

Most people who get in over their head in debt have never taken out the time to add up what they spend every month. And the banks don’t bother to ask us either. I mentioned in a previous blog entry how people will make the statement, “Don’t borrow what you can’t afford,” but I’ll argue that most people don’t know what they can’t afford.

The most helpful change in our lending practices will be to insist that people who borrow money have truly calculated their actual expenses. Make that part of the application! Not just credit card debt and car loans, but everything they spend money on - food, clothes, dinners out, everything! People don't have to prove it, just calculate it. I would firmly believe that only then would many realize they can’t afford to pay back money they’ve borrowed.


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