Conventional financial wisdom from the “experts” is so overrated!
During lunch yesterday, my wife and I were listening to her company-sponsored webinar on financial crisis management. I thought it was nice of her company to do this because families are hurting financially during COVID-19.
The webinar was delivered by one of the multinational banks.
- The 1st 10 minutes were tiresome introductions of the speakers (“I have 16 years in banking and I know what I'm talking about” introductions).
- The 2nd 10 minutes was on useful ways to cut expenses and increase income (which was mostly good advice).
- And the remaining 40 minutes was about incurring more debt through their bank (After they said to decrease debt in the 2nd 10 minutes). It was a hypocritical and shameless sales pitch.
Savings...Out of sight, out of mind.
The bank representative suggested automatically putting money into our savings account (which is a good thing), and then to “forget” about it (which is a bad thing). The concept was, if we don't know the money is there, we won't spend it. Out of sight, out of mind.
This is a poor way of building wealth, no pun intended. Wealth should be thought about frequently, not forgotten about. In relation to money, people should concentrate on:
- Knowing where it is.
- Knowing where it goes.
- Knowing how to keep it.
- And knowing how to grow it.
There are a great number of people that have unsustainable debt and the coronavirus has exposed this reality even more. To alleviate this debt burden, the solutions the bank representative suggested were:
- Refinance the debt (through their bank).
- Consolidate the debt (through their bank).
- Or seek government or company assistance.
My Critic of this:
- Refinancing the debt only works if one can secure a much lower interest rate, and since we've had low interest rates since 2008, there's probably not much savings there.
- Consolidating the debt rarely works because all one is doing is transferring debt, and adding a middleman, which often costs more money.
- Seeking government or company assistance only works in the rarest occasions, and often those are deferments and not forgiveness.
The fastest and most sustainable way to manage debt is to sell the asset, and pay some of it off. More than likely one will be stuck with more debt than the asset is worth, but that shouldn't dissuade people from selling the asset, because the name of the game is to decrease debt.
“Close to 40%...”
The bank representative suggested that people should keep their debt-to-income ratio as “close to 40%” as possible. The debt-to-income ratio is the sum of one's monthly debt payments divided by one's gross monthly income.
He not only said this once, he said it THREE TIMES! The biggest problem I have with that statement, is that he suggested we should be in a perpetual state of debt! Preferably to their bank, as almost 70% of the webinar was a sales pitch to take out more loans with their bank.
What he should have suggested was that people should keep their debt-to-income ratio as 'close to zero' as possible. Less debt, less expenses, more money. Isn't that how we stay out of a financial crisis?
House and Car debt need alternatives. If you sell the asset (house or car), then you need to get an apartment or buy an older car to get to work.
If you're desperate, you could default on the loan, they can repossess your asset, you can hold out for a year or two not paying the rest of the loan, then settle with the company for $0.20 on the dollar.
But this is extremely risky, they could take you to court, win a judgment and garnish your wages. You may have to file for bankruptcy if your debt is too much.
Conventional financial wisdom from the “experts” is so overrated! To have the assumption that Bob from Bank Trust knows more about how to handle our money than we do, is an assumption wrapped in disaster. We are much more financially intelligent than they claim to be. And our best interests are better in our hands, than in theirs.
Plus, the vast majority of the webinar was about taking out more debt to pay for the current debt, such as home equity loans, personal lines of credit, borrowing against retirement, etc...
Handling money is not hard. It is arithmetic and discipline. And most of us are completely capable of doing that ourselves.
Stay frosty people. Thanks for reading.