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5 financial fibs - and how to come clean in 2011

By Michelle Singletary
Washington Post Staff Writer
Saturday, December 25, 2010; 9:09 PM

One of my favorite movie quotes comes from "A Few Good Men," when Jack Nicholson, playing a Marine colonel, shouts, "You can't handle the truth."

And when it comes to money, people often fail at keeping their New Year's resolutions because they don't honestly assess their financial situation.

I was answering listener questions recently on "The Audrey Chapman Show" on Washington's WHUR (96.3 FM) when two callers found themselves caught in some money untruths.

I asked the first caller whether she had a budget. She paused and then gave a hesitant yes. But when you get a brief silence or a pause followed by an "um" or "uh," it can indicate that the truth may be otherwise.

Experience told me to press her. Turns out, the woman didn't have a budget. She was, however, trying to pay off debt. Budgeting will help you identify expenses you can cut and, as a result, the savings you'll need to devote to reducing your debt.

Another caller was fretting because she couldn't keep up with her bills and was losing hope. She earned a good salary. She said she had cut out every possible luxury - cellphone, cable, dining out. Then I asked her what percentage of her monthly take-home pay was going toward her mortgage (many experts suggest it should be no more than 36 percent).

She quickly answered 30 percent.

But something didn't add up. If her expenses were low and she didn't have any debt except her mortgage, then why was she still broke?

I asked again. "Are you sure your mortgage is just 30 percent of your take-home pay?"

She confidently answered yes again. But with additional probing, I found out she had lost the part-time income that was used to help her qualify for the mortgage.

I pointed out that if her income had dropped, then the percentage of her current pay going toward the monthly mortgage couldn't still be 30 percent. It was obvious to me that the woman wanted to cling to the belief that she could still afford her house. By facing the reality, she could put more effort into finding another part-time job, take in a boarder or move to a more affordable home or apartment.

Here are five of my favorite financial fibs:

lI have a budget. Having a budget in your head doesn't count. You have to write it down, which also leaves a paper trail or computer record of how you are doing financially.

lI have an emergency fund. People will swear they have an emergency fund. But they raid it so regularly that it's really just a backup checking account. I call this the emergency fund fallacy.

lI can manage my spending better with a credit or debit card. People love to think the monthly credit card or debit account statements that track their spending are great tools to manage their money. But that's simply not the case. Not only can credit and debit use increase how much you spend, but it also can result in unhealthy food purchases, according to a new study in the Journal of Consumer Research. The authors conducted an analysis of the shopping behavior of 1,000 households over a six-month period. They found that the participating shoppers made more impulsive and unhealthy food choices when using credit or debit cards.

"Paying by a card does not feel the same as paying in cash; card payments are emotionally more inert than cash payments," one of the authors, Manoj Thomas of Cornell University, told me. "Our behaviors are often influenced by non-conscious factors. I believe that mode of payment is one such factor; it can affect our consumption behavior without our awareness."

lI own my home. Unless you're mortgage-free, you don't own your home. The institution holding your mortgage does. Housing is typically the largest household expense. If you would see this debt for what it is, maybe you'd work harder to pay it off sooner.

lI don't understand why I'm always broke. This is the biggest lie. You could figure this fib out if you really thought about it. It's about needs versus wants. Be honest: You've moved too many of your wants to the needs side of your budget. So when you look at your budget, you don't see what should or could be cut.

So before you make your financial New Year's resolution for 2011, take a truth test. If you can handle the truth, you stand a better chance of becoming the better money manager you want to be.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible. Please also note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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