This is how Americans get into debt. By reading this story, you might find yourself somewhere in the mix and see what trajectory you’re on.
There is a concept called “tunnel vision” also known as Kalnienk vision, which is loss of peripheral vision with retention of central vision, resulting in a constricted circular tunnel-like field of vision.
When it comes to personal finance, I’ve seen this happen so many times. When I’m fixated a buying something, you’re in this “tunnel vision” and don’t realize how your buying decisions are getting twisted and warped. series of these mistakes can bring about disaster into your personal finance.
I hope this story will help you take a look at your current personal finances and get you out of your tunnel vision.
Here’s A Story Of Rob And Jean
Rob and Jean are hardworking, middle-class Americans. Rob is a fireman in the city and Jean is a real estate broker who earns commissions based on sales. They have two kids and live modestly. They own a house in a modest suburb where the schools are known for their strong scores.
Rob and Jean bought their home in 2008. After a couple of years, they realized that the value of their house and their equity in it has grown substantially. On top of this increased equity, interest rates had dropped. They heard from friends that they could refinance their mortgage every month than they were paying. They called a mortgage broker who confirmed it was true.
The mortgage broker explained that with a lower interest rate, Rob and Jean could use the increased equity in their home to take on more debt and a bigger mortgage while paying the same or lower monthly payments. Because the value of the house would continue to rise, they could then refinance again in the future to cover any new debts.
Rob and Jean couldn’t believe their luck. They refinanced. They paid off their credit card debts and one of their cars, bought the season tickets Rob always wanted (lower section), and even upgraded their kitchen with stainless-steel appliances and granite countertops. The best part was that their monthly payments would be considerable lower for the next three years.
Rob and Jean then became a little looser in their spending. The kids’ clothes came from mall, not just the discount chains. Dinners and nights out became more frequent. Soon the credit card balances began to grow again. They didn’t worry because they figured they could just refinance again as the mortgage broker represented.
But then Jean’s sales slowed throughout 2012. Worse still, the value of their house had not appreciated like it had in the past. No bank would accept their application to refinance. Then the rate on their three-year adjustable rate mortgage increased dramatically. Now, more money than they could afford had to get other mortgage each month. They had to start picking which bills they could afford to pay and which bills they should try to pay next month.
Soon the calls started coming. The mailbox was filled with stacks or letters that neither of them wanted to open. Rob and Jean felt tension between them like never before. Even the kids began to worry. The worst part was the persistent and harassing phone calls and visitors at all time of the day, any day of the week.
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They felt depressed and inadequate because they were unable to provide for their family. They both felt that they were the subject of whispers wherever they went.
For Rob and Jean, the downturn of the economy and the housing market and the decline in Jean’s commissions caused them to fall behind in paying their debts. For others, it could be job loss, sickness, medical emergency, the need to care for a family member, years of spending too much, the need to care for a family member, years of spending too much, or simply the slowdown in a business or the economy overall. While the underlying reasons may differ, the results are the same. The bills aren’t getting paid on time.
What We Could Learn From Rob And Jean
The story of Rob and Jean is all around us. I know few of my friends just on top of my head whose had this similar situation. What we can learn from this story is very simple. I can give you a list, but I want to just state some core principle that I’m taking away.
Just like how Rob and Jean didn’t get into this situation over night, they are not going to get out of it over night either. They are going to have to be honest with their situation and make drastic lifestyle changes.
The principal here is to NOT increase your spending along with your income.
Many Americans feel entitled to spend whenever they feel like they saved some money. And this is very detrimental to personal finance. In most cases, we don’t bother to know exactly how much more we’re allowed to spend, but instead we go by our gut feeling. But whatever we attach on top of our current expenses tends to lead to other expenses that follow.
For example, if I upgrade my car from Honda Accord to a Cadillac, extra expenses is not just the car payment. Do you see where I’m going with this? It’s like that with many other upgrades we in our lives. I go from $200 suits to $500 suits and now that I know what $500 suit feel like, there’s going to be a huge lump on my through to swallow for me to go back to the $200 suit.
Keep you expenses where it is and keep exercising good personal finance rather its raining or not.
Keep in mind that not just Americans, but we all don’t have an income problem, but a spending problem.
Question To You
This is the principal I’m drawing out from this story.
What personal finance principal were you reminded from this story? Do share…
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