The Pitfalls of Keeping Up With The Jonses

Quite surprisingly, many clients seeking help with their finances have net household incomes ranging from three to five thousand dollars per month. Yet they find themselves needing assistance with their current financial situation. Many reasons can give rise to this situation, but the largest factor is living beyond your means.

Today people continue to “keep up with the Joneses.” Whether buying a large house or a new car, most Americans don’t realize they are living paycheck to paycheck. The largest mistake made by homebuyers is to purchase the most expensive home approved. Many also neglect to consider other associated homeownership costs into their budget such as: appliances, home repair, furniture, and in some cases even property taxes. If the homebuyer has acquired a home in a comfortable upscale neighborhood, it’s likely their purchases will complement their home, such as a $700 dishwasher, a leather sofa costing $1800, or a $35,000 automobile.

Most new homebuyers don’t have the cash to immediately pay for their purchases, so they finance their American dream with credit cards. An unplanned home purchase can leave a family overextended, paying credit card interest for years. This trap hinders their ability to pay a considerable amount more than the minimum payment.

When overextended with debt the largest factor working against the consumer’s goal of financial independence is interest figured over time. Let’s assume that the new home buyer has $30,000 of credit card debt at 18%. A typical minimum payment would be $750.00 per month. The overwhelming majority of what is initially paid is getting consumed by interest, causing years of debt and for many, limited financial opportunity. Living a debt free life enables people to more efficiently plan for the future. Conversely, paying $750 per month into an interest bearing account at 8% per year for 20 years would yield the consumer over $440,000!!!

Getting and staying debt free is obviously desired, since your goal is financial independence. In order to avoid a financial blunder that could follow you for years to come, limit your expenses and live within your means when shopping for life’s wants and needs.

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