A Financial Quiz that Siri Can't Answer
Just looking at a social media feed for a few moments can prove our culture’s obsession with online quizzes. We are never more than a few clicks away from learning what “Game of Thrones” character you'd be, revealing your true spirit animal, or knowing how likely you are to survive a zombie apocalypse. We happily answer questions about our true thoughts and feelings randomly, and never give it a second thought. We then share these same mindless quizzes with our friends. Hey it’s just a quiz, no complex thought required!
Our society is strange that way. We spend time asking and answering thousands of questions that have meaningless outcomes and little impact on our lives, while some of the best questions and insightful answers are left undiscussed. Financial lessons today are learned through trial and mostly error.
Do You Have Healthy Financial Habits?
Question #1 - If you had a $1,000 unexpected expense, could you cover the cost without using credit?
A 2018 report released by the US Federal Reserve, cited that “just 39% of Americans say that have enough savings to cover an unexpected expense of $1,000 or more.” Millions of people are struggling to save money. What does this mean for you? As the recent government shutdown showed us, it can be difficult to predict what factors control our circumstances. We joke about the zombie apocalypse but many of us are financial zombies, merely one paycheck away from disaster.
Question #2 - When buying a big ticket item, do you focus on the monthly payment or the full cost?
Many consumers looking at big ticket purchases such as cars, recreational vehicles, or homes, focus solely on the monthly payment, rather than a holistic view of the actual cost of the item. For example, if you purchased an RV for $50,000 with a 10 year loan at an interest rate of 6%, the monthly payments would be $550. But over that 10 year period, the total cost is $66,000. That’s an additional $16,000 in interest, for the privilege of borrowing the money for the purchase! Would you feel the same about the purchase if you knew you would be paying 32% more for it by making a payment over 10 years? When making a large purchase, make sure to keep the total cost in mind.
Question #3 - How big of a role does a tax refund play into your budget?
It may sound counter intuitive, but looking forward to a large tax refund to pay down debt yearly may actually be hurting your ability to save and stay out of debt throughout the year. Having too much tax withheld from your paycheck may impair your ability to pay your monthly bills. It could be difficult to save up for anything else, thus a vicious cycle of debt and payoff is born. Why pay interest on that credit card when your IRS contribution is interest free? Speak to a tax professional and adjust your W-4 accordingly, and keep the money you need in your wallet.
Question #4 - Do you know the difference between your assets and liabilities?
Assets and liabilities can be a mystery to many. Assets are defined as property, belongings, and resources available to meet debts. Liabilities are financial obligations, indebtedness, for which someone is responsible for. Your home is an asset but a mortgage is a liability. Your home can only truly be called an asset when it is paid off. Vehicles are much the same way. Credit cards and open lines of credit are liabilities as well.
In order to determine true net worth, a total of liabilities are deducted from the value of any assets. This last sentence can shine a new light on personal finance for many consumers, but the truth is very few people understand how this affects their financial health. Being cognizant of these amounts will give you a clearer picture of how to achieve your personal financial goals.
Question #5 - Do you understand the true cost of cosigning for a debt?
Being asked to cosign for a debt is typically because the original applicant, for whatever reason, is not able to qualify for a loan they’ve requested. Often credit-challenged or inexperienced borrowers are asked to have a cosigner help them establish a loan. Typically a cosigner with better credit will give the primary borrower more favorable terms, but cosigning for a debt comes with great risk. You are being asked to guarantee that the debt be repaid as agreed. Often cosigners never intend to make payments, but people don’t typically plan to default either. Not only is the defaulted loan your responsibility as well as the primary borrower’s, it may impact your future ability to borrow, and your relationship. Saying “No” may be difficult, but considering what else could be at stake, it is often the best choice for all involved.
Five difficult questions later, how are you feeling? We can certainly appreciate that some folks would prefer to hear that they are “Tyrion Lannister,” or that their spirit animal is a Lemur, rather than risk answering these questions again! But the truth is that we should all be able to assess our financial health. Being able to be at peace with your budget, and achieve financial goals is critical to your quality of life.
As a valued member of Rogue Credit Union, we seek to partner with you as you reach your goals. Our mission to provide exceptional experiences that build mutually beneficial relationships, leads Rogue in offering guidance that will assist members with their financial obligations.