VOL. 126 | NO. 239 | Thursday, December 08, 2011
Rays of Wisdom
Dana and Ray Brandon
Don’t Rely On The Future
By Ray and Dana Brandon
Ray’s Take Traditionally, families have expected their financial future to improve as time goes on. It’s part of the American spirit. We expect annual raises and bonuses to keep coming our way. We expect each generation to do better than the last.
And that’s fine, as long as we don’t spend (or avoid saving) in expectation of greater things to come. That can lead to a downward spiral of growing debt and – eventually – desperation.
I recently read the sad story of a financial planner who fell into this trap. Even though his training and the rational part of his brain told him he was making a huge mistake betting on increased future income instead of cutting his current spending, he reacted emotionally: If he remained hopeful about his future income, everything would magically take care of itself. Instead, he lost everything – including his home.
The tendency to spend more than you can really afford is strongest when it comes to buying a home. Conventional wisdom suggested that people should “stretch as much as they can” when buying that first home. After all, as the years pass and income grows, that monthly payment should get easier to swallow, right?
But what if the raises don’t come as expected? In the past decade, many people have received small or non-existent raises, and some have actually seen their salaries reduced. Suddenly that barely affordable home becomes a much heavier financial weight.
And that was before home values dropped.
There is really no viable alternative to cutting spending to cope with budget woes. Expecting financial salvation through increased future earnings is a lot like counting on winning the lottery – not a wise move.
Your expenses today need to be covered by your income today – with room to spare for savings and unexpected costs. If they aren’t, you’ll find yourself digging a debt hole you can’t get out of, just like that unfortunate financial planner.
Budget for today and hold to it – allowing for plenty of savings. Then, when and if your income rises, you’ll find yourself in a position of strength instead of playing catchup.
Dana’s Take The New York Times ran that story on Carl Richards, the financial planner who lost his home.
The eerie thing about reading his story is how commonplace the family’s decisions were that led to their financial collapse. They bought a little too much house, borrowed 100 percent of the price and added family vacations to the loan. The consequences didn’t hit for six years.
Borrowing too much or charging too much on credit is kind of like embezzling – you get away with it for a while, so you keep doing it. Until it’s a big mess.
I look forward to learning more from Richards’ book, due out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.”
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.