In reading my local paper a few weeks ago, I was reminded by how it seems harder and harder to get ahead financially today. Our local newspaper ran a story about a few college graduates with staggering student loans who were having a hard time living with a basic entry level salary and repaying their debt.

A few months ago, I wrote an article on what is good debt and bad debt. In the article, I pointed out the faulty logic that college debt is good debt because it was an investment that should payoff down the road. This is faulty analysis because we put debt and investing into one bucket. The difference between good debt and bad debt is not the reason for the loan rather two key factors (i) interest rate paid and (ii) ability to pay off the loan. The reason to go to school is partially due to its investment potential and partially because a student wants to do it. A good investment is based on the money we put in to it compared to the return we get back. A student loan can be a good investment yet as we will see a bad debt (too large to pay back easily).

The article looks at a few students who had $80,000 to $100,000+ in loans to attend a private college. Due to having private loans with higher interest rates, they ended up paying back over $1,000 a month. When the average entry level salaries are only $14,000 better than a high school graduate, it becomes difficult to pay back the student loans. It is true that a college graduate can earn over $1 million more compared to a high school graduate. Yet, our drive for money has made us go after bad debt in the goal to make money.

We have incorrectly put a value on a college education that is not there. We pursue it without regards to how we may be able to pay it back. Even though I am a big proponent of a college education, I believe that we have tied to a piece of paper to a degree to our self-worth. When we believe a piece of paper can make us rich, we have given up our self-worth over to money (piece of paper is more valuable than we are). In this pursuit, we make bad decisions (taking on too much debt) to try to achieve a piece of paper that has no value.

In listening to a radio program the other day, a caller asked about what to do with her life. She had recently received a job running a new not-for-profit for teens in Mexico with an unlimited budget. Yet, she felt that she was drawn to go back to school to get her degree at age 40. When asked why she needed a degree, she responded that a degree is what is expected by society.

Here is a woman who was very competent in what she did with years of experience in the field (learning by doing). Yet, she was letting a piece of paper determine her self-worth or lack there of. It was not like she had no opportunities to do what she loved. She could have turned down this opportunity and spent $100,000 for a piece of paper, yet she would have ended up with a debt that she would have continued to pay off in retirement.

The point is when we try to look outside ourselves for worth (in a piece of paper), we end up being poor (paying off debt forever). I am not saying to not pursue a college education. Yet, what makes a piece of paper that is printed at one college more valuable than another? For some people, a MBA at Wharton may be more valuable if they if they want to be an investment banker (Wharton gets them in the door). Yet, 20 years later, the difference in the piece of paper becomes obsolete because one’s true worth is what is inside him and not in a piece of paper.

By seeing our worth, we can make more informed decisions. Instead of going after the private elite schools to try to distinguish ourselves, we can go after a public school and distinguish ourselves through our actions. I have had friends do quite well in life without a college education because they had great self-worth. One friend dropped out of school because his business got too demanding for him to do both. A college education does get you in the door, yet it is up to you (and your self-worth) to walk through it.

I was listening to NPR on show about universal health care. In listening to the report, I started thinking if we have universal health care what will change? We should have more people covered by insurance so that people should not worry as much about going to the doctor. Yet, do we need to do more than give insurance to people to improve health care?

Note, this article uses a health care example to show how trust and hope applies to our financial health. The premise is that when we trust, we take action while when we hope, we give our power away.

In discussions about universal health care, I find that personal responsibility is left out of the discussion. In thinking about the discussions, I notice how we give it away when we hope our situation improves instead of trusting it will. How I see it, universal health care is a hope that it will solve the problem where price is the issue. However, there is something missing in this and that is looking at what we can do or should do now (personal responsibility).

Part of the issue is the cost of insurance. However, part of the issue is also pinned on deductibles and co-pays. Per the proponents, proponents of universe health care say that we would not send tens of thousands of dollars on expensive procedures if we gave more people access to $60 to $100 doctor visits. Is the real issue deductibles and co-pays? I totally agree with this – treat the smaller issues before they become large issues. However, I also view insurance where the small costs should be covered in a budget because when small costs are covered by insurance, the profit, commission and administration costs of insurance would increase the cost of a doctor visit significantly. So, why do we need to provide preventative health care when in perspective, the costs are minimal to other larger health care costs (such as paying some money into an emergency fund instead of paying off credit card debt with high interest rates and fees).

It got me to thinking why do some people forgo the doctor visit (or emergency fund) when they know they have or could have a potential problem. There may be millions of reasons such as not having enough time, not having the money to pay for it or believing that the problem will get better. These solutions are short-term focused versus looking at the long-term (considering impact of what happens if it does not get better).

I have written in the past that struggle (financial or otherwise) makes it harder to get out of a situation because we give up trusting the situation will work and instead we focus on put out short-term fires hoping our long-term situation improves. The energy of putting out fires, keeps us from being able to thrive because our energy goes to the short-term fix instead of long-term solution. For the person with the medical issue, it may be a struggle between going to the doctor and putting food on the table. There may be a hope that the medical condition improves on its own, as other medical issues may have done in the past. The morale is that the short-term struggle with living day-to-day keeps people from having a long-term outlook of healthy living. This keeps the struggle going from one issue to the next, as time is spent overcoming one issue a new issue comes up.

I bring this up because even if we have universal health care, we will still leave other problems because universal health care does nothing to solve some of the long-term preventative issues (e.g., exercises, nutrition, etc.) that would go a long way in taking care of short-term issues (costs) due to poor health. It is easy to forgo that morning workout because our schedules are too hectic. Yet, the underlying issues is we are hoping some short-term work (go to work to catch up or spend time catching up with friends and family) to make our lives better versus looking at a long-term solution (proper eating and exercise) which can give us better vitality where we can get more done in less time.

To bring this back to trust and hope, when faced with a struggle our instincts are to focus on the short-term hoping the situation improves instead of focusing long-term solution and trusting. Financially, this may be living day-to-day and hoping for government to step in and help (with universal health care, lower taxes or more benefits) or for a company to offer us a better position with proper pay. As we focus short-term, we overlook long-term solutions which need to be done to get up on our feet and stay up (education, savings, balanced budget, etc.).

The key difference, in which situation we take either short-term (living day-to-day in struggle) or long-term (the solution), are trust. The more trust we have the longer-term focus we develop and the better off we will be. Trust is having an unshakeable belief that we can make it through a situation, thus our focus in long-term (our future). Hope is having a disbelief that we can make it through, so our focus is on what is lacking now in the short-term (here and now) because a better tomorrow may never come. We may think of hope as looking at tomorrow (future), yet it is more about what is going on today (here and now). Hope is about believing that today is not so good and that tomorrow is our only option. Trust, on the other hand, is about knowing a bump in the road is temporary so the focus is not as much about now (the bump in the road) rather the future (the road to recovery from the bump). Trust is about doing what we need to do to stay on our long-term course.

We may think of trust as giving up control and hoping. So what is the distinction? When we fly, we trust the pilot. Yet, before trusting the pilot we have actually done our homework that their airline is relatively safe (taken some responsibility on taking action on research). If we have not done our homework (known that flying is safe), we are hoping and praying that the flight will make it. Trust is doing what we can and letting the rest go. When we say that we trust that things will work out and do nothing, it is actually hope because everything is out of our hands. We are saying that we do not have any influence on the outcome, thus this is the only option is to hope a higher power (in one form or another, spiritual or government) to step in and save us. We are saved by doing our part and trusting the rest.

We may want the government to help us with things like universal health care and hope it actually happens. Yet even if we get it, it does not work unless we do our side of preventative health (do not get sunburn, over and over again; exercise; do not smoke, etc.). Trust is doing what we can about our health, knowing that everything will be alright because we have taken that first step.

Financially, when we are in a struggle, we need to shift from hoping our situation improves (questionable belief) to trusting that it will (rock-solid belief). This means taking action on a long-term perspective to get to where we want to go because we when we trust, we take action. When we hope, we leave it up to someone else to step in doubting we can make it happen on our own.

If we had a rock-solid knowing (trust) in our financial situation, we would pay for the $60-$100 doctor visit to ensure our long-term success instead of hoping the condition gets better because we are struggling day-to-day hoping our situation improves. Universal health care can help with some of the higher bills. Yet unless we take action on our own to go to the doctor and exercise, universal health care is only a hope that something happens to improve our health and finances instead of trusting if we do our part, the rest will fall in place. Financially, for people in trouble, this is doing our part to cut our spending, increase our income (improving our skills) and becoming a better risk candidate (to lower our interest rates), knowing that other things will fall into place to reduce our situation (or debt).

Thus, even before we hit the financial side of what to do, the key is to look at our beliefs. If we are hoping (doubtful) of a better financial future, we need to transform it to a trusting (knowing). We do this by seeing how much control we have in a situation and knowing that the universe has not stacked a deck of cards against us (where everything goes against us). Thus, look at your situation with a fresh set of eyes and list everything that you can control about your finances. If we are honest, there may be more that we can control than we initially thought of.

We all know by now the basic interest cost of a loan. If we have a $20,000 car loan at 7% interest for 5 years, the amount of money we pay back is approximately $23,800. Thus, the cost of the loan is $3,800 (interest paid) plus any origination costs (e.g., car dealers may add on another $50 or more for their services). For me, the cost of a loan like this is not that big of deal because it is fixed cost, relatively low interest rate and a large part of the interest rate is due to inflation.

When inflation is reflected, the cost of the loan decreases significantly. Assuming 3.5% inflation rate, the cost of the loan is broken down to $1,900 for inflation (purchasing power because $1,000 today is worth $1,035 next year) and $1,900 ($3,800 – $1,900), is for the lender’s profit to do the loan. The real cost of a loan net inflation reflects the profit for lender to reflect risk and lender’s opportunity to use money elsewhere.

For me, paying a little bit more in the future due to inflation versus paying it off now is a wash especially if wages are indexed for inflation because of the equivalent purchasing power (this ignores the possibility of earning more on investing versus paying off the debt). For example, for someone earning $50,000 and purchases a $10,000 car, he could pay off the car in year 1 (at 20% of his salary). Otherwise, if he received a 3.5% loan (reflecting inflation only) and got 3.5% raises, he could pay off the loan over 5 years using 4% of his salary each year ($2,000 in year one, $2,070 in year two, $2,142 in year three, etc.) to get back the cost of the care, 20% of his salary.

Many see this as the real cost of a loan when they sign the loan papers. However, I started to think about if there are any additional costs behind the numbers. For example, the cost of a payday loan is not only for the cost for the 1st two week period but also for subsequent periods because the principle is typically not be paid off in the first two weeks and additional loans are taken out until it is. This is similar to credit cards that charge 12% interest on $2,000 balance. The cost of the loan is not the $20 interest charge in the first month, yet the total interest paid (that can add up to $200+ if not repaid within a year) plus any late fees.

Yet, there are other costs that are hidden. For example, a loan reduces our flexibility that can relate in higher costs on our other financial transactions.

Future Loans – When we take out a loan, future loans may have a higher interest rates associated with them. For example, if we take a $300,000 mortgage that lowers our credit score because it is deemed that our debt to income ratio is too high, we can be charged a higher interest rate when trying to buy a $25,000 car because the bank fears that we may fall behind in payments.

Insurance – We all know by now that lower FICO score could increase our automobile insurance. However, I started thinking about the higher cost of needing lower deductibles. Many times, people forgo a higher deductible (or drop comprehensive coverage altogether) because they are living paycheck to paycheck and could not afford the cost of replacing their car if something happens (could they afford a $1,000 deductible if living paycheck to paycheck). Thus, they get a lower deductible, at a higher cost, to substitute for an emergency fund because it is hard enough to have one car loan let alone add another loan on top of it if their car got stolen or damaged.

Credit Cards/Pay Day Loans – If we are paying off a car loan, we are probably not saving (putting money away) for the next car or possibly even saving for an emergency fund. Thus, it is easier to slip into a situation where taking out a short-term high interest rate loan is needed because we were not in a position to save money. If we were ahead of the game, we could be saving a large down payment for the next car which adds another layer to any existing emergency fund. Thus, if something were to happen, there would be extra savings around (for next car) that can get through the situation if needed.

Opportunities – The more leveraged we are, the harder it is to make adjustments to our personal situation out of fear of impairing an already tight financial situation. For example, it is harder to quit a job (without another job in place) if there are too many loans to repay without enough savings to get through a few months of a potentially long job search. Or, if you want to start a business that needs 1 to 2 years to get off the ground, it is harder if you are maxed out financially.

I am not against loans. Actually, I took out a car loan because at the time I did not want to dip into my stock portfolio or savings because I wanted the flexibility to change jobs and possible buy a new home (did not want to use a large portion of my savings just in case I needed it). Yet, in 2 years when my situation changed, we bought a new home so I did not need as much in savings to pay a dual mortgage if I could not sell my current home. Thus, we were able to payoff the car loan early.

The point is that we need to be aware of our financial situation to see that if a loan is pushing us closer to the financial edge where the cost of that loan in more than the interest paid on it. The added costs are possibly higher because other financial decisions are dependent (possibly costlier) on what we do now (if we take on too much debt).

Many people know what it is like to live paycheck to paycheck. We (as a society) have made a game out of living on the edge, kind of like playing chicken waiting for someone else to blink first. Unfortunately, the economy does not blink by allowing us to continue to live on the edge indefinitely. Thus, for many, living on the edge, waiting for our fortunes to change, is a disaster waiting to happen. It is a waiting game where one small financial hiccup puts them over the edge and possibly into bankruptcy. It can be scary to live on the edge, yet we, as a society, have become so good at it that we have become masters in the art of tight rope walking. Each time that we survive, we get a little braver and take on more risks, walk even a finer line between financial success and financial disaster. It only takes one little slip to fall off the edge. Why do we do it? We have become accustomed to thinking in terms that just getting by is good enough. We have fallen into a trap without even realizing it. So why have we fallen into this trap?

We get a little ahead and then ease off

When we have financial trouble, we have set our goals just to the point of recovering such as getting out of debt but not higher goal of saving (as mentioned in Why is Getting Out of Debt so Hard?). It is like saying that we will go on a diet if we hit 200 lbs. When we see the scales tip to 205, we make a goal of losing 5 pounds and slip back into our old habits when the scale tips to 199. Because our goal was not higher, we stay right at the edge. Financially, this is living day by day. So, when we fall into debt, we make quick changes to get out and ease off our financial goals when our debt is eliminated, yet never are far removed from slipping back into debt again.

If we see ourselves tilting over the edge a bit, we make small changes that last a few months (e.g. make a goal of not eating out at all) to get us back from falling over the edge. The short-term changes we make are just that, short-term and are sometimes unrealistic in the long-term. Thus, we keep on going on and off diets and are happy with the results in the short-term. However, the changes we make can not be sustained over the long term (e.g., live on bread and peanut butter for a month). We choose the short-term solutions instead of looking for a better longer-term solution (looking for a room mate to share the rent payments) which can get us ahead of the game. Sometimes what we need is a longer-term change that will get us beyond our short-term goal of just surviving. Yet, for someone living on the edge, all they look at is the short-term, wondering if something will happen.

Do not want to be too greedy

Sometimes when we are struggling financially, we envy those who are well off. For some this is used as motivation to achieve what they want. For others, it brings up resentments that others have what they do not. Thus, for this group, they form a belief that the rich are just greedy and should be despised with their resentments. Unfortunately when their financial fortune turns around, they avoid being like those greedy people that they despise. They tend sabotage their success so that they do not appear to be greedy (hoarding money) like the people they despise. And, in their mind, they have not set the limit of what is greedy ($1 million, $100,000 or $10,000). Thus, having any money can be construed to be well off and thus can lead to greed. So they unconsciously avoid having any substantial amount of money.

No motivation to change

When living on the edge, we have a sense of what can happen (e.g., having a financial setback). Yet, there is no real motivation to change our habits. If things are going o.k. now, why would we want to make a change that makes us feel like we have lost something (cut back on some spending). We rather feel o.k. now than deal with the shame that we would have by giving something up or by not giving our children everything they should have. We would rather stay the course (and play to a draw) than feel like we just lost a game (need to give something up), even though it would have set us up for a brighter future. We put so much of our worth in what we have that giving up something can seem like a fate worse than death because it represents a failure. We need to see that just like exercising is critical for our future health that setting up an emergency and retirement fund is critical for our financial health.

Complacency

If many American’s are living paycheck to paycheck, it is easy to fall into the trap that this is all there is. If others can not get out of the situation, why would we be able to? Role models play a big part of our financial success (and success in life). If we look around to see everyone else living paycheck to paycheck, we feel that we are off the hook from trying to achieve anything different.

Envy

We look at others who seem to be having the good life: sailing on their yachts, traveling around the world or even just sitting back in the back yards cooking on their monster grill. We want a glimpse of this perceived good life and take any opportunity to get it without thinking about the long-term circumstances. The drive to ease this envy is so overwhelming that we give into it (reason why marketing works), like needing to get an ice cream cone on a hot summer day at the beach. When we tie our happiness based on having what others have, we are more concerned about the “here and now” more than setting up a solid financial plan for the future.

Taking advantage of not being behind

I was reminded today watching the news that when we have a nice day outside (especially in Cleveland), we take advantage of it wondering if we will get a series of bad days (snow or rain). In working with people’s finances, I have heard the phrase that “money seems to slip through my (their) fingers as soon as it comes” their way. For some, the belief that they can have money is difficult to imagine. Thus, once they do get some money, they figure they might as well to spend it before something else comes up (e.g., bill collector or an unplanned expense) that takes their money before they can enjoy it.

So what can we do?

1. Set up a financial plan

By seeing what we want to shoot for, we become less envious of what others have around us because we are focused more on our goals.

2. Pick better role models

We often set our sights too low on what we can accomplish. We see people like Oprah and believe that she is lucky, something that we can not achieve. So, we choose examples of what we can accomplish (or not) and never really push ourselves to bigger and better things. So pick a role model of someone that has achieved success, something that you can strive to become.

3. Understand how abundance works

Unfortunately, the world does not work where if we give up some money, it will end up magically with someone who may need it. Even if we give a direct donation, it may help the person short-term yet not long-term. People who don’t feel abundant need more than our money. They need to understand how to fish (figuratively). We can not become poor enough to help others to escape their poverty. By not living up to our full potential, we may actually give them another role model showing them why living day to day is not all that bad to achieve for. If Bill Gates settled for living in his parent’s garage, where would we be today? Bill has made a lot of money, yet he has also help generate a lot of jobs for others. If he played small and did not claim his abundance, he would have been able to serve the world like he has with jobs and all his charity work. He did not take abundance from others, rather generated more abundance by creating jobs and a computer system that has made our lives easier (even though we complain about it crashing).

4. See how we have become complacent

Probably the biggest step is to become aware of we have settled for living paycheck to paycheck instead of having what we could have achieved whether it is with money or other aspects of our life. If we do not see how we have kept ourselves a prisoner to living on the edge financially, we will not understand that we also have the ability to get out of the situation.

With many more credit counseling firms, there are few good companies and other companies out to take advantage of unsuspecting consumers. When people are in debt, their desperation to fix their credit situation makes them more vulnerable to being conned. I have known people thinking that a company was going to help them get out of debt only to find out that the company closed up with no forwarding address. To make matters worse, they find that the credit card companies with their debt have not been paid as promised. So what can you do to not be one of their unsuspecting victims?

First, understand the motives of the company vying for your business:

1) Companies that really want to help you

These are companies that want to understand the whole situation and help you with your budget. They know that the problem with debt is not just paying off the debt, yet educating their clients so that they do not get back into the same situation again. The focus is understanding the whole situation so that they can focus the education where the consumer needs it to be to continue, instead of just focusing on getting out of debt. Their fees are also clearly defined and easy to understand.

2) Others companies (there are too many to lists)

Many companies have their intentions to make money as their first priority instead of helping their clients. Some have even been set up as non-profit organizations that were set up to look like they were in the business to help, yet were the entry way to push their clients to their for-profit operations. Even though businesses need to focus on making money to stay in business, it should not be to the detriment of helping their clients get out of debt as some companies in this group do.

How do you avoid being a victim to companies who are in the later camp? How can you tell the difference? There are a few signs of trouble that should raise a red flag

1) Advertising

The companies who spend the most on advertising may be a red flag to look out for. The companies that really want to help their clients usually have a good reputation where they do not need to promote themselves as much. I tend to ask friends for a recommendation to help weed through the sea of many companies vying for any service. And, then double check with the Better Business Bureau (www.bbb.org) before pursuing. Thus, it may be better to trust a recommendation before an advertisement airing at 3:00 in the morning.

2) Pushing a plan on you

If you are sitting in an office for less than 10 minutes and they have already given you a plan to follow, their intent may be focused more on selling you a plan than helping you out.

3) Wanting you to sign on the dotted line before leaving

A good company will let you think about what you are getting into and more importantly to check them out before signing any agreements. Those that want you to sign before leaving are probably thinking more about the commission they are going to get for signing you up.

4) Do not clearly discuss their fees with you

Fees should be clearly spelled out and fully documented; preferably not in fine print. Compare the fees from one company to another and read the fine print to make sure there are no hidden fees.

So how can you find the best counseling firm?

1) Take a step back

When we hit the time to call a credit counseling service, many people feel pressed to find something quick because they have gotten fed up with all the calls about their debt. The tendency is to rush out for the magical solution as quickly as possible because the stress has gotten to be too much. The best thing to do is take a deep breath and know that you have options. Even if you need to take a day off to visit 3 credit counseling firms and review the information overnight, it is better than trying to fit one appointment in and sign out of desperation.

2) Read up on the topic

There are a lot of things to think about when hiring a credit counseling firm. Some of the better publications may be from our own government (Federal Trade Commission) that has looking into this business especially after the most recent bankruptcy reform.

Fiscal Fitness: Choosing a Credit Counselor from FTC

For People on Debt Management Plans: A Must-Do List from FTC

List of companies approved by U.S. government to offer financial education needed to proceed with filling for bankruptcy

National Foundation of Credit Counseling with a list of companies accredited through their organization (mostly its original Consumer Credit Counseling Services affiliates)

3) Take the first step in handling your finances

This may sound counter intuitive when looking for help with your situation. However, a good credit counseling service is going to ask some basic questions: What is your budget? What debt do you have? Have you called the credit card companies to lower your rates? It makes the process go a lot smoother when you come prepared. Plus, it is about taking another action step towards owning your power. Sometimes people give their power over their finances to credit counseling services and are not that involved. Yet, because the consumer needs to continue on with their finances after their debt issue is solves, it is best to be a partner with a counseling service and share the responsibilities. Plus, it make you more aware of your situation so that you can ask better questions to see which plan will work best for you.

4) Comparison shop (look for the right plan not the easiest solution)

As I mentioned before, it is not wise to jump at the first credit counseling service that comes your way. It is best to look at the different options that you have and pick the best plan for you. This may not be the easiest plan, for example a plan that promises to reduce your debt or a company that pays the bills for you. Each of these types of plans has been known for the possibility of serious abuse and fraud even though they seem to be the simplest plan for the consumer. Thus, do not take the easy way out and find the advantages and disadvantages of each plan. You can even review this with an independent financial planner or a financially astute friend. This is a big financial step that should not be taken lightly.

Credit counseling may be a very valuable step in taking control of your finances and, in particular, debt. However, because of consumer’s desperation, the field is ripe for fraud and abuse for consumers that do not fully investigate the company they sign with. Unfortunately, it is not even as easy as saying going with _______ to get the best service. I remember asking a client what counseling firm he went to. I asked if it was Consumer Credit Counseling Service which he replied that he made sure it was due to thier reputation. Unfortunately, it turned out to be a company with a very similar name that shut it doors soon thereafter, leaving him high and dry and deeper in debt. Thus, the key is to fully analyze your decision by interviewing a few agencies, getting a recommedation from trusted friends and double checking with the BBB and even with your State’s attorney general’s office before signing on the bottom line.