He Said It! I Did It! - One of My Biggest Mistakes

You might be asking, “Why personal finance hypertension and not cancer?” Well, I feel that cancer is a bit dramatic and a bit of a cliché. How many times have you heard of someone dying as a result of poor financial decisions except for those episodes in mobster movies where some poor schmuck gambles more than he can afford and Vinny goes Barry Bonds on his skull? My point is that poor financial decisions are rarely fatal. Therefore, I feel that a more appropriate analogy is hypertension.

Now you might be asking why hypertension. There are a host of other maladies that could be analogous to personal finance difficulties. Well, I picked hypertension for a reason. First, hypertension is never obvious. Second, hypertension wreaks havoc on your body. It puts extra pressure on your blood vessels and your internal organs. Your body has to work harder to maintain equilibrium. You can look healthy and happy on the surface, but hypertension is hammering away internally. People can live with hypertension for a long time before they experience any outwardly obvious effects. Third, it is usually when something else goes wrong that hypertension becomes apparent because it exacerbates other illnesses like diabetes. If your hypertension isn’t kept in check it will cause stroke, heart attack and any number of other debilitating illnesses.

How does this relate to personal finances? Your consumer debt is like hypertension. How many people do you know who are living well beyond their means? On the surface, they look great. They drive fresh cars and dress in the hippest fashions. They use consumer debt to keep up the lifestyle. Underneath the surface, finance charges are wreaking havoc on their personal finances. They find themselves working harder to keep up with the payments. Although they look prosperous, finance charges are hammering away at their net worth. If any financial crisis strikes like losing a job, the consumer debt like hypertension exacerbates an already bad situation.

People do not realize the negative effects of consumer debt. Similar to hypertension people do not realize the extent of the damage until something goes wrong. It is hard to quantify the extent of the damage that hypertension is causing from one month to another. However, you can quantify the effects of consumer debt from month to month. When you get your credit card statement, make a visual beeline to the finance charge section of your bill. Ask yourself, “What would my net worth be if I could invest that amount every month instead of paying for the privilege of carrying the debt?” If you add up the finance charges, and it equals $300 that amount could be invested to make you a millionaire in 30 years.

The reason people dig themselves into this kind of hole is that they fail to budget. They spend in accordance to what they think they should have based on their peers and the images that they see in the media. They strive to live at that level, and they do not think of the financial consequences of spending beyond their means. Most of us have been guilty of that sin, but like hypertension, this condition is treatable.

Here are three tips to curing your financial hypertension- budget, plastic surgery, and prioritize payments. Budgeting is the first step. The only proven way to live within your means is to write down the amount of your take home pay. Write down by line item your monthly expenses. Budget in future vacations, special events, and potential emergencies. If you do this exercise and the number exceeds your pay you need to take action to reduce your expenses. Determine what items you can live without such as premium cable, CDs, and extra clothes. Then identify those line items you can reduce like utilities, various services (cell phone packages, phone company extras like voicemail) and entertainment. Determine how much you save by taking these steps and apply them to your debt.

Then do your best Nip/Tuck impersonation. Like our fine TV doctors in Miami, go to town and do some serious plastic surgery. Cut up your credit cards. Keep one low interest credit card, put it in a plastic bag full of water, and throw it in the freezer. That way, you have at least one credit card for a real emergency, which does not include a sale at Macy’s or a Pussycat Dolls concert. This will prevent you from making impulse purchases. You will have to at least wait for the card to thaw to allow you time to consider using it.

The third tip is to prioritize your payments. Some people suggest getting rid of your smallest debt first. The argument is that this will provide you with psychological momentum that will help you accomplish your goal of being consumer debt free. That approach has its merits, but I suggest the more mathematical approach of paying the minimum on all of your cards except your highest interest card. I would apply the rest of the money budgeted for debt to your highest interest debt. That will more efficiently reduce your finance charges.

Hypertension does not disappear overnight. It requires new disciplines. You have to change your eating habits. You have to incorporate exercise into your lifestyle, and eventually your blood pressure will go back to normal levels. The same is true for debt reduction. You will have to adjust your lifestyle. You will need to exercise some discipline. After a while, you will eliminate your debt. Eliminating debt is critically important. This discipline will allow you to take those dollars that you first identified on the finance charge line of your credit cards and apply those to investments which will have the opposite effect of consumer debt. Instead of seeing your debt go up every month reducing your net worth, you will see your net worth go up exponentially increasing your net worth.

The benefits are universally accepted. Instead of slowly contributing to your death, practice the tips in this article which will gradually contribute to your financial health and prosperity. Don’t let something that is eminently treatable become a serious health concern. Take steps to reduce your financial hypertension today.