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Excessive Financial Optimism Can Be Dangerous

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financial_optimismThe December poll hosted on the National Foundation for Credit Counseling (NFCC) website revealed that more than half of the respondents, 56 percent, predicted they would be in a better place financially at this time next year. This response rate tripled the next highest category where 18 percent of respondents indicated their situation would remain about the same as it is this year.

“Financial optimism is a healthy sign, but it’s going to take more than hope, more than a New Year’s Resolution, to make financial success a reality,” says Gail Cunningham, spokesperson for the NFCC. “People need to guard against financial amnesia, the affliction of too quickly forgetting the financial mistakes and pain of the past. One way to do that is by having a financial plan. Although the future can’t be predicted, consumers can protect themselves from financial unknowns by making smart money decisions today.”

Financial control starts with financial awareness. New Year’s Resolutions typically involve getting out of debt, but the basic step of creating a spending plan is rarely on anyone’s list, as many people don’t want to face the financial facts. Continuing to ignore current spending patterns can prevent a person from identifying and addressing the very reason that debt reduction is not achieved.

NFCC encourages consumers to take the first step toward debt reduction by building a 2014 financial plan, including the following often forgotten or ignored areas. The result will be a comprehensive and realistic budget, moving the goal of debt reduction closer to becoming a reality.

• The unexpected. It’s usually not the daily routine expenses that wreck people’s budgets, but the emergencies. Prepare for these by socking away 10 percent of each paycheck into a rainy day fund. At the end of a year, it will total more than one month’s income, enough to cover most short-term emergencies.

• Long-term savings. Protect against serious set-backs such as job loss. Even though the unemployment numbers are improving, no one is immune to job loss. If the unthinkable happens, bridge money will be needed to help manage daily expenses and existing debt obligations. Without it, people frequently resort to living off of credit cards, often amassing an

unmanageable amount of debt. Experts recommend having a minimum of six months’ income as a cushion. Since it takes quite a while to build up this amount of money, now is the time to start saving toward this goal.

• Known periodic expenses. Birthdays, anniversaries, holidays, vehicle tags, and quarterly insurance premiums are examples of expenses that occur at the same time each year. In spite of being able to anticipate these expenses, many people neglect to set aside the money necessary to satisfy such events.

• Household and vehicle maintenance. Things are going to break, and usually at the worst possible time. Without a plan to cover the expense, people are left with poor resolution choices: take money from a higher priority such as the rent or mortgage, thus compromising that category; charge the expense and add to an already burdensome debt load; borrow from family or friends which is awkward and potentially puts the relationship at risk.

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