Why I See a Need to Post About Personal Budgeting

I post on budgeting and personal finance here from time to time. Some people wonder why I do that. For one thing, the financial health of a condominium association is closely linked to the financial health of the owners. For another, there are lots of indicators that we, as a society, aren't very good at making personal financial decisions. For example, there have been a large number of articles about the $1 trillion in college loan debt in this country, which is now larger than credit card debt! Apparently, many Americans carry that debt into retirement, and the situation has become so serious that Sen. Dick Durbin sponsored a bill to accelerate such loan forgiveness, and the House passed a bill on Friday to keep interest rates on these loans for 2012 at the current 3.4%. If congress fails to act, the interest rate will rise to 6.8%. It was reported that the President has threatened a veto.


Just How Serious is the Situation?
Many people are resistant to this financial reality, and yet, according to a recent Harris survey, here are some facts about adult Americans:

• 33% of all American adults don't pay their bills on time.
• 36% don't pay on time or have some bills in collection.
• 39% of households carry credit card balances and pay interest on that debt each month.
• 56% don't have a budget.
• 50% don't know how much they spend from month to month.
• 39% have no savings, and no retirement savings.
• 55% have not reviewed their credit score.

Student loans are also a problem for borrowers. In a recent Wall Street Journal article, it was stated that:

• 27% of borrowers who have begun repaying their student loans are defined as delinquent. 

Many Americans complain about the problems of a profligate and foolhardy government. Yet many of those same Americans are no better with their personal finances.

Many Americans also fault the credit policies in the country. This country promotes personal choice. With that choice comes personal responsibility. Simply because one can borrow hundreds of thousands of dollars doesn't mean that one should do so. When it comes to debt, it is not "free money" and there is no one standing over us, with a gun to our heads saying "Borrow, or else!"



Is Large Personal Debt a Cause for Concern?
Should personal debt be a cause of concern in associations? It's useful to remember that every owner in an association must pay their mortgage, their fees, maintain condominium owner's insurance and pay their real estate taxes.  Failure to do so puts the owner into financial jeopardy which can lead to delinquency and default on the mortgage. When we read about "distressed properties" and ridiculously low real estate prices, there is a reason. It can be traced to the financial difficulties of owners. So it's reasonable to be concerned about owners who become financially overextended. They may jeopardize the finances of the association and may contribute to low ball sales and real estate prices.

It's possible that some will attempt to control their plight by becoming members of the board of managers of their HOA. What better way to reduce fees, and relieve the financial stress they are experiencing?

There is abundant information about the financial plight and lack of ability of Americans at Edutopia, studies funded by the Social Security Administration,  and  websites such as the Motley Fool.


What the Experts Say
Experts say that without a budget or budgeting skills that one can expect to have financial difficulties at some time. However, since about half the adults in this country don't have a budget, it's apparent that they prefer to pretend that they have enough money to support the lifestyle they choose, or to simply wing it.

The first step toward taking control of  personal finances is to do a realistic assessment of how much money you take in and how much money you spend. In other words, do a budget. If one is to avoid a lot of financial pain, it is prudent to do a budget before one begins racking up credit card and other debt. Thereafter, one should keep the budget current and should use it.

What  is the Current Situation?
Some experts point to a lack of financial literacy for many Americans. Age and education don't generally matter. If education was a factor, then we wouldn't have a $ Trillion in college loans sitting out there. In other words, getting a college degree does not assure financial ability.

Here is a financial survey. It doesn't paint a pretty picture:

Clicking will open a  New Window> Harris Poll On Financial Literacy


My Concern as a Condominium Owner
At present we have wonderful bargains in real estate. We also have low interest rates for home loans. With an anemic real estate market, sellers have grown impatient and there has been added pressure on real estate agents to close the deal to maintain or improve personal income. In other words, there are lots of incentives to sell at bargain prices.

I again see loans being advertised with adjustable rates, and similar types of financing that would seem to be dubious after the worst financial disaster since the great depression. These financing schemes assume an improved ability on the part of the buyer to pay higher mortgages in the future. In other words, higher earnings or better financial control and budgeting on the part of the purchaser at some day in the future. Yet the reality according to the surveys and the increasing college debt indicates that Americans are doing exactly the opposite. Many Americans are overextended financially and their financial skills, earning skills and planning skills do not improve with age.

It's my concern that the real estate market is again attracting buyers who may be borderline in their financial ability to pay back those loans as well as the real estate taxes. In a condominium association, there are additional requirements including mandatory association fees and mandatory homeowners insurance for all owners.

Any association that has delinquencies or foreclosures is dealing with the consequences. Any association that has these delinquencies or foreclosures is not collecting all of the fees that the budgets are based upon. In other words, HOAs are financially close-knit communities where each and every owner does make a difference. When an owner defaults or goes delinquent, some of that money will probably become noncollectable. In other words, the fees of the other owners will make up for those bad debts. If there is good news, it is that larger associations are better able to handle a few delinquent owners. If there is good news, it is that most owners, according to statistics, do catch up or make credible efforts to catch up. So the dollar amount may not be significant.

Here's an example of how a large association can deal with "bad debts." Let's assume an association has a $1.5 million annual budget. If there are "bad debts" of $10,000 in a single year, what does that really mean? That $10,000 represents a reduction of income of 0.67%.  Is that significant? Let's look at it this way. The median household in the U.S. has an income of about $50,000 each year. If that household had a similar "bad debt" it would cost the household $33.33 in that year, or $2.77 a month. Most would agree that's a trivial amount, which will not cause the household distress. So too for any HOA that has a similar situation. I don't suggest that we dance in the streets, nor do I suggest that we hold our heads. For a financially responsible HOA, there are a lot of issues to deal with, and delinquencies and foreclosures are a consequence of personal factors, not the fault or blame of the association.

My current concerns are founded on the view that the economy is fragile and so is the income generating ability of many families. While we may be feeling better, this unwinding of debt that the economy is experiencing is far from over. There is a real possibility of another contraction. Budgeting is a tool that allows one to ride out these storms. Of course, that knowledge must be coupled with positive action.

Today presents a wonderful opportunity to purchase a home or condominium. It is also a time for caution. Am I advocating to avoid such purchases? Quite the contrary. What I am advocating is this is the time to make a budget and do thorough economic introspection. It is not a time to make rosy projections, or to make purchases because "I deserve it" or "I want it."

Remember, it's your financial future you are messing with, and the future will one day be the present. These decisions will determine your financial well-being.

Notes:

1. The economy grew at a rate of 2.2% for the first quarter of 2012. That is insufficient to add meaningful jobs to the economy. 
2. The official unemployment rate is 8.2%  and there are officially 12.7 million unemployed. Unemployment for teenagers is 25%!
3. The U.S. economy is doing better than most economies in the world. That's not a good thing or a cause for joy.  The world in interconnected.