Competitor: This article comes from Randy of www.DailyDollarNewsletter.com.
Entry Category: PF Olympics Finals
Are all the golden rules of personal finance valid anymore? Americans still feel the lingering effects of the economic crisis that began in 2008. Millions of homes have been lost to foreclosure, consumers have defaulted on credit card, line of credit and other types of debt, credit scores have plunged and incomes have not improved. In order to avoid a repeat performance of the Great Recession, do we need to abandon what we have been taught in terms of money management?
Still The Golden Rules Of Personal Finance?
Do an Internet search on the golden rules of personal finance and you will find no shortage of authors each with their own twist on the same principles. The golden rules of personal finance are simple to understand. Age old money strategies to build good financial health include:
Managing Money For Today
- budgeting so you spend less than you earn
- monitoring and using credit responsibly to build a strong history and credit score
Managing Money For Your Future
- building a rainy day emergency savings fund
- funding a retirement account through your employer or individual plan
Financial Tools To Protect Your Family
- buying life insurance to ensure your spouse and children can replace your income
- establishing a Last Will and Testament or other estate planning mechanism to ensure smooth transition of cash and other assets to your heirs
Why The American Dream Became A Nightmare
So, if you budget and make sure you don’t spend more than you earn, put some money from your paycheck into a retirement plan, pay your bills on time and take steps to protect your family with insurance and basic estate planning, shouldn’t you feel good about your financial situation?
Unfortunately, for tens of millions of Americans those behaviors weren’t good enough.
Many generations of people have pursued and achieved the American Dream of homeownership. However, in recent years, tens of millions have experienced that dream become a nightmare thanks to the economic crisis, recession and slow recovery.
Hard working families are struggling to make their monthly mortgage payment, millions have already lost their home to foreclosure and our court system is inundated with more foreclosure cases. According to Clarity Services, Inc., a credit risk management firm, over 43 million Americans now have a credit score of 599 or below.
Introducing The Prior Prime Consumer
A new economic category of consumers has emerged called the Prior Prime. Its ranks are growing fast. Stable jobs, decent income, consistent on-time bill payments and a feeling of general financial health are common traits amongst this group.
A survey by Clarity Services revealed that 40% of Prior Prime consumers have been in the same job for five or more years and 64% have incomes between $25,000 and $75,000. Sounds like a good group to extend credit to, doesn’t it?
Ironically, these consumers tend to have the same salary today as when they were considered good credit risks, Despite this, their access to credit is now limited and although these same folks may have been considered creditworthy before the Great Recession, they are now struggling to access credit.
Why Does Prior Prime Exist?
If you’ve managed to maintain your income and have made budget sacrifices to ensure that you paid your mortgage and other bills on time why would you suddenly go from a good credit risk to bad overnight? In the DailyDollar article 3 Reasons Why American Credit Scores Dropping, you can learn more about how banks have reduced, froze or closed lines of credit for a huge portion of the population.
This has caused a double whammy for affected consumers. Not only has their access to credit been drastically reduced but their credit scores dropped faster than Facebook’s stock price. Sadly, many people in this group adhered to the golden rules but still got burned.
Finance Options For Prior Prime Segment
The post-recession America is experiencing a combination of tighter underwriting rules for loans and less availability of credit. These changes are forcing millions of Americans to abandon traditional credit sources.
For example, Prior Prime consumers are turning to expensive payday loans as an alternative. Clarity Services reports that there has been over 500% growth of the number of consumers applying for payday loans that fall into the higher earner segment of the Prior Prime market!
Consumers are also turning to peer to peer (P2P) lending to access financing for emergency home improvements, car repair, medical bills and other unplanned expenses. Companies like Prosper.com make it easy for private lenders and borrowers to find each other.
Families are also an option for financing. In the past 18 months I have helped mortgage clients avoid expensive private, “hard money” loans by having them turn to family to finance mortgages and other loans. Loans between family members can be a win-win since older family are seeking better returns on their money than the nearly zero percent interest being paid by banks on savings and CDs.
What Personal Finance Beliefs Should We Abandon?
The golden rules of personal finance have never been more meaningful than now. Abandon them? Never. The only thing that consumers should abandon are the bad behaviors that contributed to the financial collapse such as taking on too much debt.
The long-standing beliefs that property values only go up and that home equity is a smart source of financing to consolidate credit card and other debt have been shattered. Additionally, banks have slashed or frozen home equity lines and credit card limits at an average of $10,000 per consumer according to Fair Isaac Corp. (FICO).
Rededication Will Lead To Financial Health
The economic crisis and resulting recession is a teaching moment for consumers. Easy credit and risky investments were the name of the game during the boom times. During those years I watched people liquidate their retirement accounts and use the cash as down payment on risky real estate deals. Property owners also tapped the equity in their homes and land and used that cash for other risky deals.
Now we know that credit is not always available when you need it. Consumers, especially the new segment of Prior Prime, must rededicate themselves to the golden rules and work toward regaining their financial health.
About The Author
Randy Mitchelson is an entrepreneur, author and community activist with almost 20 years experience in financial services. He authors and manages the DailyDollar™ personal finance channel which is available via Blog, YouTube, iTunes, Facebook and Twitter. U.S. News and World Report named DailyDollar to its list of 8 Savvy Personal Financial Podcasts.
Mitchelson founded National Web Leads in 2005 which merged with Reach Media Group in 2012 where Mitchelson is Partner and CMO. Reach drives new customer acquisition through email, web display, social media, keyword search strategies, mobile devices and more.
Reach’s clients include payday lenders, auto loan lenders, educational institutions, legal services, health and beauty product distributors and more. Reach distributes customers’ marketing campaigns via it’s network of publishing partners. Lead generation companies and lenders utilize software solutions provided by Reach’s technology affiliate company Applied Cognetics.
Mitchelson has served in leadership roles for Fortune 500 firms Bank of America, KeyBank and CIBC. As a licensed mortgage professional and member of National Association of Mortgage Brokers, Mitchelson educates both individuals and groups about credit scoring by conducting personalized credit report reviews, action plans and one on one consultations. He is author of the free monthly newsletter,Mortgage by Randy.
Mitchelson earned his BS and MBA at Rensselaer Polytechnic Institute in Troy, NY. He is a founding member of the Southwest Florida Regional Technology Partnership Inc. and Vice President for the Michelle’s Angels Foundation Inc. He is married to Susan, a Pharmacy Supervisor in the Lee Memorial Health System in Fort Myers, Florida.