For a long time I have wanted to write a blog titled “The Rich Get Richer, The Poor Get Poorer, and Why” which would focus on exactly that. I don’t care to make this specific post into a full fledged blog today, but I am currently working on a more lengthy, detailed, and most importantly helpful post on this in the background.
Working in the finance industry certainly gives me an interesting perspective into the inner workings on personal finance. What I mean by this is the small, itty bitty decisions people like you and me make every day, every hour, which impact our financial well being.
We can talk economics all day long but even on a micro scale, economics is still a macro issue. We could debate and fight and bicker and argue but no matter your view on economics or government fiscal policy no single piece of legislation would have any significant, lasting, or even immediate impact on anyone’s financial status. Ultimately, none of those debates really matter.
What I’ve found is that the biggest factor that plays into peoples financial health, so to speak, are the tiny decisions they make on a daily basis. We’re always going to have those outlier data points such as kids born into super rich families or those born in a dumpster with one eye and a tail. But if you show me 20 people who are struggling, I can show 17 of those same people who are struggling because of a series of shitty financial decision making.
This isn’t my way of berating anyone. A lot of the people who make bad decisions don’t know they are making them. And importantly, a lot of the decisions they make which adversely affect their financial health aren’t always immediately presented as financial in nature, or they don’t suspect it will have any immediate financial consequence, if at all.
The spark for this random post on a Thursday evening was one of my clients. I have literally thousands of clients. I interact with dozens a day, hundreds per week. I have seen it all. Filthy rich, to flithy poor. Incredibly intelligent to “aw, bless your heart”.
Today I had a very nice client contact me. She was concerned about the price of her insurance going up, as we all are. So I dug into her car insurance to see what the deal was. How dare her rates go up! Rates have been going on steadily across the state thanks to all you texting-and-drivers out there, so it’s not uncommon for someone’s rates to seemingly go up for “no reason”.
Well that wasn’t the case. A couple months ago back in August she had a suspension on her license which in California pretty much is a death blow to your insurability. The reason for the suspension was a “failure to appear” which just means that she got a ticket, didn’t pay the ticket (or contest it), and now the California DMV dinged her driving record. She basically got a ticket and did nothing.
Now, she probably thought that by not paying the ticket, she was saving the $300-450 the ticket costs. (Speeding tickets were $360 in California circa 2016 are are probably higher now. Carpool tickets were $481 circa 2014.)
Unfortunately, she didn’t realize the financial consequences of not paying the ticket. Even if the government never gets a dime from her for that ticket, she’s still going to pay handsomely for it, and in fact, will pay much more.
In this particular clients case, her insurance is $685 every six months. Her insurance renews in a couple days, and because of the suspension, her new premium will be $974. Let’s do some math. All things held the same, her insurance is going up $289 every six months. Score, right? Wrong. Suspensions, tickets, and accidents stay on your records for 36 months, or in insurance terms, about 6 renewals. This means that this suspension will ultimately cost her $1,734 over the next three years just from increased insurance premiums.
And this specific client doesn’t even have an expensive account. She’s driving an 11 year old car, with the state minimum liability limits. If she owned a new car, or had decent limits, or had multiple cars, you could very easily take that increased premium and double it. She rents, and probably thinks it’s okay to have the coverage she has, but if she was a homeowner or someone who for security reasons needed to have good coverage, this one little suspension would have ended up costing them close to three grand.
Let that sink in for just a second. THREE. THOUSAND. DOLLARS.
I’m not blowing smoke. This is all legit. The numbers are real. I see this day in and day out. This sweet girl turned what was probably a $400 ticket into a $1700 problem. Had she known about all of this I have no doubt that she would have made a different decision. But we have a huge population of people who don’t know the financial consequences of their actions. And this was a relatively minor mistake. Unless she took traffic school, this ticket is invariably going to end up on her driving record as well, and she’ll get docked for that as well. More money.
What about paying her other bills late? Late fees. Cancellation fees. Reinstatement fees. Utility shut off fees. Utility start up fees. All real things, all tied to real expenses businesses have to pay for when such instances occur. Internal estimates from some of my companies say that when all is said and done, it can cost anywhere from $5 to $7 for them to mail documents to a client. So that $10 cancellation fee you got that you thought was bullshit? Think again.
The point I am trying to drive home here is this. Everything is a financial decision. The car you buy, the state, city, neighborhood, and even the specific house you live in. The food you eat. Whether or not you have a baby. Your lifestyle choices. I drink Coca Cola and recently had a $1,300 root canal, after dental insurance. You bet your ass I wish I could have gone back and not drank sugary beverages and spared myself the time, physical pain, and money. of getting my damn teeth fixed.
But bodily health issues aside, the one common denominator that I see with people who are financially unhealthy, is that they fail to get in front of their finances. They carry over credit card balances. They let checks bounce. They get eaten alive by the aforementioned fees. Those $10 “pain in the ass” fees as small as they are individually, will amass into financial colon cancer if unattended.
But the single greatest litmus test between the rich and the poor is which side of interest you fall on. Are you earning interest, or paying interest? Here’s a hint: Banks make interest on your money by lending it out to others via mortgages. You pay interest on your mortgage, car loan, student loan, and credit cards. It’s not just interest. It’s dividends, residuals, royalties. Those little tiny (or in the case of mortgages) not so tiny sums of money that over years, over decades, are the difference between one socioeconomic bracket, and the one three brackets over.
That’s it for today. Just remember, every thing you do is a financial decision. If financial independence and strength is important to you, decide wisely.