Common sense and life experiences, part two
Jul 05, 2017 08:30AM ● Published by Neighbors Magazines
by John Masus
As you might guess, I like to read financial columns. They are usually filled with ideas, examples and various suggestions. Some articles hit the nail on the head, while others use a regular screwdriver when a Phillips is necessary. In other words some suggestions were helpful and some not so much. Why do I think that?
Well the short answer is that I have been doing this type of work for the better part of 40 years. My perspective comes with the fact that I’ve been able to work with real people in the real life situations. So I’d like to start the financial discussion with the great American dream.
Home ownership is the very foundation of that American dream. We all want to have that feeling of ownership. I remember when we contracted for our first house. It would be built on our new ½ acre lot. I stood on that lot after the closing and picked up some of the dirt and let it fall through my fingers. I’d never owned anything like this in my life. So why start with this topic?
Well I recently read a financial article where the author said and I quote “Buying a house is a great investment.” I tend to disagree with that statement. In fact I think that thought process can get a home owner in some unwanted financial difficulty.
If a home is thought of as an investment, the potential to use it for other purposes could put it at risk. If thought of as your home, it is the last thing you think of using to solve financial challenges.
Let me give you an actual example. I couldn’t make up a better story than this one. I met a couple who were deeply in debt ($35,000) making minimum payments on their credit cards. She had just gotten a raise so they were planning a trip to Hawaii to celebrate their 10th wedding anniversary. The trip would be on the credit card.
They were advised to pay off the credit card debt with an additional home equity loan. They were told that the potential was there for the home value to appreciate and eventually out-price the added loan. (Whatever that meant) They wanted a second opinion. I gave them one.
Before you continue reading, think about what you would have advised them.
There are a number of issues here. First and foremost they must recognize that they have a serious financial problem that has to be fixed. It is a spending behavior problem.
My advice was to celebrate their wedding anniversary here and go out to a nice dinner. Cancel the Hawaii trip and consider that a major step in the right financial direction. Create a budget. Consolidate the credit card debt to the lowest interest rate and come up with a budget and a plan to pay it off in five years using their current income and her new raise.
I also mentioned that paying off the credit card debt with an additional home loan only inflames the situation and could create another problem. Since they are used to seeing that large credit card debt on their monthly bill, when it goes to zero they could feel relief and using the credit cards again could be extremely tempting. They didn’t feel that they had a problem and chose the home loan option.
I saw them again on some insurance matters about three years later. In a casual conversation he wondered if I handled debt situations. (I don’t) But because of that question I knew the debt was back but with an added burden. So what’s the lesson here? How about, wrong decisions can be detrimental to your financial health. In the end it’s common sense and life experiences that should prevail.
John Masus is an LPL registered principal with clients in 24 states. Securities offered through LPL Financial. Member FINRA/SIPC. Masus Financial Group, Ltd. is a Registered Investment Advisor and a separate entity from LPL.Financial.
Masus Financial Grp.,Ltd. has been located in downtown Batavia for over 24 years.
Email address John.Masus@lpl.com