Personal debt is one of those problems that kind of creep up on you. You think that you’re just doing your thing. You might think that you have everything under control. This is precisely why it’s a problem because you are often laboring of a false sense of security. You might think that as long as the numbers line up in a fairly rough way, then everything is going to be okay.
Unfortunately, this is how most Americans handle their personal finances. Sadly, it only takes only takes one medical emergency or you losing your job for your personal financial house of cards to come crashing down.
If you don’t want to paint yourself into a very dire financial situation, you need to identify the four assumptions listed below. See if they play a role in how you make financial decisions. See if they are at play as far as far your spending decisions are concern. If you spot any of these assumptions, then you need to be more proactive regarding how you think about your personal finances because you might actually be just one unforeseen circumstance away from personal financial disaster.
Nobody likes to declare bankruptcy. Nobody likes to borrow emergency loans. So don’t put yourself in that situation. Unfortunately, that’s exactly what you’re doing if you subscribe to the following assumptions:
It’s very common for Americans to assume that they’ll always have jobs. Unfortunately, you only need to look at 2008 to see how wrong this can be. The whole financial house of cards come crushing down and guess what, it can be triggered by completely unforeseen factor. Few people saw Lehman brothers folding. Not surprisingly, a lot of people were just caught by surprise. This unleashed a wave of bankruptcy that flattened many household across the United States.
Instead of always assuming that you’ll get a pay raise at your job so you can then keep increasing your levels of personal consumption, you might want to dial down your assumptions. Instead of assuming that you’ll get a pay raise, you might want to reexamine your assumption that you even have a job at the first place.
While fees are easier to prepare for because financial companies give you advance warning, interest rates on the other hand can be nastier. You have to remember that we live in an interconnected global financial market. Certain conditions that happened in certain markets are bound to have an effect at other markets.
Financial interest rates can be affected by a wide range of factors. While there is still advanced notice involve here. If you’re locked-in in as particularly nasty level of debt, any upward movement in interest rates can inflict a lot of pain as far as payments are concerned. This is especially the case if you’re leaving to paycheck to paycheck basis. So don’t assume that interest rates and fees won’t change.
Always factor in some legal room here. This way, you can be more cautious when entering a long term debt.
There are many ways to define inflation. There are many ways to look out how inflation affects you. My personal favorite is to define inflation as another tax. That’s the bottom line. Inflation is another tax on your income and if you assume that inflation would stay low, you might be in for nasty shock in the long term.
If you look at the financial timeline of the United States, we’re actually only been living a low inflation and low interest rate climate for a relatively short period of time as far as the overall financial history of the United States is concerned.
If you extend the time line passed a few decades, you will see the real face of inflation. It’s not normal to see inflation at less than 5%. Historically speaking, inflation has always been a little bit south if 10%. If you’re living in an age where inflation has been around 3% or less, doesn’t necessarily mean that this would always be the case. You have to change spending habits accordingly; otherwise, you might get blindsided.
Don’t assume just because you’ve been quite effective retiring old debt that you can start taking out new debt. Things may change drastically as far as regulations and the overall financial pictures of your lenders are concern.
Just because you are able to retire a past debt that doesn’t necessarily mean that you can take the same level of debt in the future.
In fact you shouldn’t assume this at all. You should say good riddance to that past debt and try to reduce your prospective that in the future to lower and lower levels. At least this should your assumptions.