Financial Services

Tools of Financial Management

1) Investing - where you put the money you have earned.
2) Loans - how you borrow money (wisely) to provide funds for current needs.
3) Insurance - how you protect the assets and income you have built up.
4) Credit Cards - this is odd to have as its own. It is truly a form of a loan. However, credit cards are used extensively by consumers as a primary transaction tool and deserves a distinct category.

Good financial management is about prioritization and choices. What are your plans for the future? How will you afford them? What will you not do now so that you can afford what you want later? Unfortunately, the American consumer typically does not forgo today's desire to gain tomorrows wishes. Good financial planning entails balancing the two.

Often, the financial choices that are made are done so with little real information or understanding.

From about 2000 to 2005, many home buyers were buying more house than their income could truly afford. This happened as they were enticed into purchasing homes with Adjustable Rate Mortgages such a 3/1 ARMS or 5/1 ARMS. These allow the borrower to take a mortgage at an extremely low initial monthly payment. However, once the the Adjustable interest kicked in after the 3rd or 5th year, the monthly payments increased to levels beyond their means to pay. Best case scenario, these people simply had less money available for saving and investing. Unfortunately, the best case scenario was less often seen than the worst case: foreclosure. These families lost any equity they may have had, were forced to leave their homes and put a dent in their finances that will be difficult to repair.

It is not always about the "big" mistakes. Everyday decisions can slowly erode the value of your investments. By 2008, credit card debt is at an all-time high. Personal savings is virtually non-existent. This occurs as people create patterns of behavior that eat away at their monthly income and ultimately spend beyond it. Good Financial health begins with a good understanding the the financial tools you use.

Consider this:

If you carry a balance on a typical credit card, a $100 purchase will cost you $128 over the next 12 months. A $1,000 purchase will cost you $1,280 (22.5% interest on the credit card and 4.5% interests not earned on the money put into a savings account compounded monthly). If you had to pay 28% - 32% more upfront for your purchases, would you be as quick to buy them?

Put your own numbers into the calculation:

Credit Card Interest Rate (annual) Card Purchase Savings Interest Rate (annual)