Swimming With L.T.C.s
There's a reason that some of the most profitable and well-managed companies in the world seem to gear their operations toward providing "contractual" services. Software companies, for instance, have long focused on ways to promote recurring income, especially from their business customers. Buy your front-office software from us, they tell business owners, and we'll keep it updated and maintained for the low low price of only [enter fairly outrageous dollar amount] per year. The upshot of this is that good businesses want to do everything they can to get customers on a recurring-payment, rather than single-purchase, basis. Oh, how they love to get you wrapped up in those Long-Term Commitments (LTCs).
So, in the matter of personal finances, what do we talk about when we talk about LTCs? Well, we start by turning a glaring halogen lamp on items like these:
- Home Mortgage
- Auto Payments
- Home Equity Loans
- Revolving Debt (Credit Card Balances, etc.)
- Consumer Debt (Furniture loans, computer loans, home improvement loans, etc.)
Obviously, this is just a cursory list. Big business has been astoundingly creative on its own behalf, dreaming up lots of other pay-over-time expenses, too — cell phone contracts, or home pest-control plans, for instance — but many of these could be modified or discontinued (albeit at a penalty) if absolutely necessary.
Basically, if it (1) requires a commitment to making or raising monthly or yearly payments, and (2) would be difficult to discontinue at any given time, then it is an expenditure that must be absolutely scrutinized on your part.
Long-term commitments demand exquisite care, concern, and planning before you undertake them. Each and every LTC must be measured and planned on its own merits.
Let's consider home mortgages and auto loans. These are, in my opinion, the two most dangerous LTCs out there, mostly because they (1) are packaged so innocuously, and (2) facilitate purchase of items which are conducive to major emotional attachment. In these cases, the Golden Money Rule is this:
You have to know exactly what payment you can afford before you even begin shopping, and you must discipline yourself to stay within that payment when the deal is signed.
This brings to light an important point: Often, the worst danger isn't so much in simple, once-in-a-while overspending. Rather, the nastiest demons lurk in overcommitting on a monthly basis. By doing this — by taking on a heftier-than-planned mortgage, say, or a new truck payment so large it erases any margin for unexpected expenses in our monthly budget — we make our overspending a matter of habit. A matter of repetition. And unless we want Nine-Fingers Frank, the Repo Guy, at our door, that overspending becomes a matter of necessity.
The catch here, and what makes long-term commitments so dangerous, is that many of these overcommitments don't start out as overcommitments at all. They end up that way, though, when unexpected dervishes come into our lives and play havoc with our income and our expenses: Consider the effect of pay cuts at work, or layoffs, on your household finances. Consider prolonged illness. Divorce. Unexpected pregnancy. Expected pregnancy with unexpected complications.
None are uncommon. All are potentially devastating.
Remember: In the forest of life, risk and loss are not always clothed in bright orange vests.
No Such Thing as Negligible
Let's say you pay your auto insurance on a monthly basis, at an amount of $103.50. Your insurance premium is $100 per month, but the insurance company charges you a service fee of $3.50 per month if you pay monthly, as they would typically prefer payments be made semi-annually (once every six months). The insurance premium itself is a long-term commitment, to be sure. You can't dodge that (not legally, anyway). But so long as you're paying monthly, that $3.50 is also a long-term commitment of your money. It, however, is one which you can, and should, eliminate.
Anything you might do to vanquish that $3.50 charge — such as saving up the necessary funds to pay your next 6-month bill in full, and then continuing to make the following 6 monthly premium payments to yourself via a Freedom Account so the full amount would be available to you for the next bill — would be a victory on your part.
Take a moment to scan your other monthly expenses for items like this. For instance, lots of people pay monthly fees of $6 to $10 for their checking accounts. That is certainly a long-term commitment — it'll be there every month of every year that you do business with that bank. So if your bank or credit union charges this sort of maintenance fee, can you get rid of that fee somehow? Or change banks? If so, you've just freed up anywhere from $72 to $120 a year.
Understand that when it comes to long-term commitments of your money, you must be ruthless. Every dollar that you can free from commitment is crucial.
If you're concerned with playing great defense with your money, then there is no such thing as "negligible."