Avoid Making Poor Financial Decisions

Avoid making poor financial decisions and your life will be so much less stressful! This is what goes through my mind when I see people walking in and out of PayDay Loan outlets.

Payday lenders like to view themselves as financial services companies that promote themselves as 'putting people first'. I find this extremely puzzling when you delve into what rates they charge on installment loans, payday loans, and lines of credit. If you just do some very simple math you see that the forms of credit extended by some of these 'alternate lenders' (CashMoney and MoneyMart) are unlikely to reduce a client's stress level. At least these lenders are upfront that the pricing of their credit facilities is exorbitant!

What is even more worrying is a company like goeasy Ltd. (GSY.to) that blatantly preys upon unsavvy consumers. This is a company that conducts business under the easyfinancial and easyhome banners. CBC Marketplace researched easyhome and easymoney a few years ago and more recently on alternative lenders. To think these alternative lenders really care about their clients is a huge stretch of the imagination!

If you look at page 31 of 57 of goeasy's FY2019 and FY2020 year-end financial statements, it is readily apparent this company is deliberately preying upon consumers who have never learned to avoid making poor financial decisions. Look at the Median TransUnion Risk Score reflected in the tables on page 31. In FY2020, goeasy deemed its 'low risk' clients to have a median credit score of 617. Now, look at what TransUnion deems to be a good credit score. That's right! A good credit score with TransUnion and VantageScore 3.0 is between 661 and 720.

In essence, the mean credit score of goeasy's 'low risk' clients is below what TransUnion deems to be a good credit score. goeasy essentially preys upon consumers unable to avoid making poor financial decisions.

Let's look at some of the most basic practices consumers can follow to avoid falling prey to these alternative lenders.

You Might Require Sound Independent Financial Advice...

The same people who get themselves in a terrible financial predicament might not have the proper skill set to embark on the path to success. In some cases, sound independent financial advice might be entirely necessary. Check the segment of the Government of Canada's website about credit counselling service providers and perform research before engaging the services of a Debt Counsellor or Debt Coach.

...Or Learn From Books

Independent financial advice might be warranted depending on the severity of the financial problem. Other people are not in such dire straights and might be able to set themselves on the right path by reading some easy-to-read and understand books.

This is a brief list of books that teach the basics of personal money management and how to avoid making poor financial decisions. This is certainly not an all-encompassing list.

Set A Clearly Defined Financial Goal

In many instances, some people can avoid making poor financial decisions by implementing a few minor changes in their life.

The first step to avoid making poor financial decisions is to set a goal. By definition, a financial goal is a target to aim for when managing your money.

A goal must motivate otherwise there is a reasonable likelihood we will not put in the work when circumstances become difficult. The goal must also be S.M.A.R.T (Specific, Measurable, Attainable, Relevant, and Timely).

Set Realistic Objectives

A budget should not simply look good on paper. The numbers need to be based on reality. If, for example, someone is accustomed to buying 3 - 4 cups of coffee/day, it is unrealistic to expect the complete and immediate elimination of coffee consumption. It is far more realistic to scale back daily coffee consumption over a period of several days.

The same applies to lunches. When accustomed to buying lunch 5 days/week, it is far more reasonable to bring lunch to work 2 days/week and to increase this by 1 day/week every week until lunches are no longer purchased.

Make the goal less daunting and set short-term, mid-term, and long-term objectives.

Objectives are precise actions or measurable steps to move one closer to the goal. They should be specific targets that have a time-bound schedule or timeline for completion.

Equally important is to record the goal and objectives in writing and to look at them daily. Remember, if they are out of sight then they are out of mind!

Short term financial objectives

This might include the repayment of credit card debt or the accumulation of an emergency fund. Whatever the objectives, they should be achievable within the year.

Mid-term financial objectives

The fact these will take 3 - 5 years to achieve is indicative that the dollar value of these objectives is greater than the dollar value of short-term objectives. Examples of mid-term financial objectives might include the accumulation of sufficient funds to make various renovations to the home, the purchase of a vehicle without reliance on financing, etc..

Long-term financial objectives

Long-term financial objectives typically take longer than 5 years to achieve. Saving for a college/university education, a sizable downpayment for the purchase of a home, etc. are examples of long-term financial goals.

All Family Members Must Be On Board

Extricating yourself from a financial predicament can sometimes be easier if you are single. This is especially true if not all family members are on the same page concerning the family's dilemma. Imagine being the only family member who thinks the family needs to avoid making poor financial decisions.

All family members must be united on improving the family's financial position. If all family members are part of the TEAM (Together Everyone Achieves More), the probability of achieving the financial goal increases exponentially.

Create a Budget and Meticulously Reduce Expenses

Expenses are either fixed or variable.

Most of us know our key fixed expenses such as rent, mortgage payments, property taxes, loan payments, etc.. Some fixed expenses can be reduced but this is typically a more involved process. This might include moving to less expensive accommodation or going down-market on the vehicle (number of vehicles) driven.

Variable expenses are modified more easily than fixed expenses. Examples include the elimination of multiple entertainment services (know anybody who subscribes to cable TV, Netflix, Disney+, Amazon Prime, and Crave TV?), a more basic cell phone package, etc..

The possibility of eliminating other variable expenses might not be so readily apparent if we do not know how much we spend on 'stuff' (eg. coffee, dine-out, cigarettes, booze, etc.). I strongly encourage tracking ALL income and expenses DAILY to avoid making poor financial decisions. It is surprising how much 'flies under the radar'!

Budgeting will require changes in spending habits. If too much is spent on categories like entertainment, shopping and recreation, adjustments will need to be made. Failure to do so will increase the risk of overspending each month.

Our daughter and her boyfriend monitor all expenses daily on an Excel spreadsheet. After doing this over several months, they can more readily detect expense patterns and take appropriate measures where warranted.

Budget Based on Net Income

Always create a budget based on net, or take-home, income. We might earn $X annually but our 'net' earnings are far less after deducting taxes and various source deductions.

Budgets Are a Tool to Help Grow Personal Savings

Always include a line item within a budget labelled 'Savings'. This line item is a priority and should not be relegated to the end of the list of outflows. Populate this line item with a realistic level BEFORE recording fixed and variable expenses. If the net monthly cash flow is negative after having included an amount on the 'Savings' line item, then some other expenses need to be reduced.

Practice Delayed Gratification

I firmly believe it is essential to practice delayed gratification to avoid making poor financial decisions. People in the habit of acquiring 'stuff' on impulse are probably more inclined to spend money frivolously. On the very rare occasion, I go to a thrift shop. While observing what is on display I am amazed at how some of the clothing has never been worn. In fact, some clothes still have the original price tags affixed to them.

Not surprisingly, delayed gratification sometimes leads to no longer having the desire to acquire the item for which delayed gratification was practiced.

You Have How Many Credit Cards?

Keep it simple. It is far too easy to lose track of expenditures when we have too many credit cards and multiple bank accounts.

More House Than Money

I have mentioned in previous posts, most recently in Your Investment Strategy Should Account for Inflation’s Impact, that:

'we have never really viewed our home as an asset even though the accounting definition indicates it is an asset. We do not view it as an asset because it does not generate income. In fact, our home is an expense in that we have to pay property tax, maintenance, repairs, and utilities. How we treat our home from an asset/liability perspective is a matter of personal choice. We just choose to be super conservative.'

Not everyone agrees with my perception of a principal residence but my/my wife's philosophy on how we value our home has helped us avoid becoming 'trapped' by it. In many cases, people buy too much home and it ends up destroying their budget. It might be time to downsize to something more affordable when the mortgage or rent payment is the underlying cause of financial anxiety.

Do Not Spread Yourself Too Thin

Avoid making poor financial decisions by spreading yourself too thin. It might be tempting to repay debt, build an emergency fund, save for a child's education, make retirement account contributions, save for a vacation, etc. but we need to be realistic. Inflows only go so far. Try to attain multiple objectives simultaneously, or take on too many responsibilities, and there is an increased risk of unnecessary strain on the budget.

Your 'Friends' Might Be Part of Your Problem

Not everyone with whom we associate shares our financial mindset or even remotely attempts to be as budget-conscious. Continually hang around with these 'friends' and the likelihood is remote we will avoid making poor financial decisions.

This does not mean completely cutting these people out of your life. Just be conscious of what activities you do with them.

Celebrate the Small Wins

Everyone needs to have a little fun. Allow for some occasional fun to reduce the odds of relapsing into making poor financial decisions. Naturally, the reward should not set us back on achieving our objectives and goals.

Final Thoughts

Some come to the realization they need to avoid making poor financial decisions but know not how/where to begin. The challenge is they never had a great role model to teach proper money management.

Proper money management is no different, however, from learning anything else. We have to:

  • learn from proper sources;
  • be open-minded and willing to study;
  • put into practice what we learn; and
  • never quit until success is achieved.

Nobody says it will be easy. If it were easy then everyone would avoid making poor financial decisions.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: Please send any feedback, corrections, or questions to [email protected].

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Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. You should not make any investment decision without conducting your research and due diligence.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with the company mentioned in this article.