Affording the Payment is Different than Affording the Debt

             I meet with people all the time who are really trying to dig their way out of debt.  They come to Halcomb Singler, LLP, to discuss their options including debt consolidation/creditor workouts, mortgage modifications/foreclosure defense as well as Chapter 7 and Chapter 13 bankruptcy.  And one thing I have noticed is that many people have a hard time understanding how they are getting behind on bills because when they add up their income and expenses the numbers are about the same.  Over the years I have observed that just because you can afford the payment doesn't mean you can afford the debt and I'd like to discuss what exactly I mean by that in the rest of this blog entry.

           One example that I see quite often is that an individual or couple has gotten behind on mortgage payments.  The mortgage payment in and of itself is typically very reasonable and the person I am meeting with believes it is an affordable payment.  However, time and time again people fail to take into account all of the upkeep that comes with owning a home.  I myself have to write a fairly substantial check for the replacement of my air conditioning and furnace tomorrow.....and at some point so will each and every person who owns a home.  It is very easy to forget about the fact that the appliances aren't going to last forever and that the home will need to be painted (inside and out) on occasion and that the plumbing in the bathroom doesn't last forever, etc.  The list could go on forever.  However, until you have been a homeowner through a few planned and unplanned repairs or upgrades I believe it is difficult to appreciate how much it really costs to own a home.  Certainly when you purchase a home the monthly payment, taxes and insurance should be taken into account in considering whether you can afford the home.  In my experience people are very good at taking these items into account.  However, make sure that you can afford more than the monthly payment prior to purchasing a home because if the decision is made taking only the payment into consideration it can spell disaster for your budget and financial health.

          But the "I can afford the payment" attitude goes far beyond the purchase of a home.  It can be used to justify a new piece of jewelry when there is a 12 months same as cash deal at the store, the purchase of an item on a television shopping network or the new play gym for the kids.  I believe that the "I can afford the payment" mentality is very dangerous and often gets people into financial trouble because instead of looking at the total amount of debt that they may incur they are only looking at the monthly payment.  It is very easy for a person to accumulate thousands of dollars of debt by continuing to tell themselves that they can afford another $80.00 a month or another $150.00 a month.  However, if a short-term layoff or health problem prevents that person from earning a paycheck for even a month it can be the beginning of a downward spiral that ends in bankruptcy.  Once a few payments are missed that it can be very difficult to recover even if one finds another job or the health issue is resolved.  This is because once a payment is missed the interest rates go way up and there are late fees tacked on to what is already owed on the payments that were once affordable.  It is simply a cycle that is very hard to escape from once it has started.

          So how do we avoid the "I can afford the payment" attitude?  It's simple and two-fold.  The first rule is to make sure that you are living below your means.  Living below your means is a very subjective statement.  To me it means having enough money left over after you have paid your monthly bills each month to save at least 20% of what you earn after taxes for retirement and a rainy day.  In my opinion, if you are living in a way that you are able to pay your monthly bills each month, but could not pay $1,000.00 for an unexpected vehicle repair without using credit you are living outside of your means.  The second rule to avoidance of the "I can afford the payment" lifestyle is to shun credit.  If you want the new appliance save up for it and pay cash.  If you want another car figure out how much you want to spend and start setting aside some amount monthly to go for that car.  Don't buy something you can pay for in cash.  (If you've read my other blog postings you know that a house and your own student loans are my exceptions to this rule).  Get yourself to a place where you are uncomfortable owing money to anyone or anything.  If you don't have all of the payments to think about then the temporary loss of a job or health problem I spoke about before are less of a financial crisis and will cause you and your family less stress.

           So avoid the "I can afford the payment" analysis for your next purchase and start to improve your financial health.  If you are a person living in the Indianapolis/Hamilton County area who has, unfortunately, gotten to a point where the payments are overwhelming and you are not sure what to do next I am happy to meet with you to try to work out a plan out of debt.  There is no fee for this consultation.  Just click here to fill out our information page (we don't ask for your address) and my office will contact you for an appointment or call at (317) 575-8222.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.