Everywhere we turn there seems to be a “stress test”. First, the stress test is performed by my cardiologist to make sure my arteries aren’t clogged. Thankfully, they aren’t. My doctor just says that I need to lose 20 pounds, get more exercise and I will hopefully live to be at least 80. Then, there was the government’s “stress test” for banks. The “too big to fail” group passed which was not surprising after Congress passed the Troubled Asset Relief Program (“TARP”),which allowed them to borrow money at 0% and then charge borrowers 5%+ for the same money.
So, I decided we need to have a “consumer stress test” since I plan to live to 80 years old and I am not “too big to fail.” Let’s see if we, as consumers, pass the “consumer stress test”:
1. Do you have credit card debt? If you do, this is not a good sign. Credit card lenders are like drug dealers. Drug dealers give away drugs to get kids hooked and credit card lenders give away money to get consumers hooked. They will give you money until you stop paying the balance in full each month. They know it is just a matter of time before you will stop paying off the balance and then it is all over. It is a win-win situation for them every time. Stop using credit cards, pay off them immediately. “Doctor’s” first piece of advice: If you can’t pay off the balance in full in the next 12 months, see an attorney for options.
2. Do you have a car loan? If you do, this is not a good sign. Cars are depreciating asset. If you have a car loan with a payment of $400 per month, you need to make $800 per month to just make that payment of $400 because of state, federal, social security and other applicable taxes. Is that car really worth it? Probably not. If you cannot pay off that car loan in the next 2 years, see an attorney for options available to you. “Doctor’s” second piece of advice: next time you purchase a car, no car loan. Save until you can buy without a loan.
3. Do you have home loans? If you have home loans that exceed 2-2 ½ times your gross household income, this is not a good sign. What we know is that having home loan debt that exceeds 2-2 ½ times your gross household income, makes you “house poor” meaning you are spending too much of your income on shelter. For example: if you make $50,000 a year, your home loan should not exceed $125,000. If your home loan balances exceed 2-2 ½ times your gross household income, see an attorney for options available to you.
4. Are you putting at least 10% of your gross household into a 401k/IRA/savings each year? If not, this is probably the worst of sign of all. We will need money when we can no longer work and want to retire. If your income has recently been reduced, you can also reduce the amount you put into your 401k or IRA, but don’t stop thinking about tomorrow.
If you don’t take care of your money, no one will. Everywhere we turn, there is someone trying to get it. If you did not pass the consumer stress test, seek legal counsel. The government may not be willing to give us money or let us borrow at 0% interest like they did for the banks, but we do have the Bankruptcy Code which can give us a fresh start. We must take the time to think about tomorrow. It will be here sooner than we think.
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