When 'no' is the best answer

Just say no...to your bank. In my recent Indy Star column I took up this topic because I've seen a lot of people rely on their banks' answer to be the answer. If the bank says I can afford this house, then let's buy it. If the bank says I can afford this vehicle, let's buy it. And so it goes until your financial life is a mess. Why would your financial life be a mess? Because believe it or not, banks are very liberal with their 'yes', especially when it comes to the percentage of gross income that they will lend.

"Banking executives and lending officers have told me that their financial institutions will allow a mortgage payment to account for 33 percent of a person’s gross monthly income. This is way too much.

A household with a $44,000 a year income could potentially be approved for a $1,210 monthly mortgage payment. The problem is that $1,210 is nearly 50 percent of this household’s take-home pay. A monthly mortgage obligation should account for no more than 25 percent of net income. Our bills aren’t paid with our gross income. Our bills are paid with our net income (take-home pay). If this household was approved for a $1,210 monthly payment, its financial life would be ruined, with the blessing of their bank." (courtesy of the Indy Star)

We have been conditioned to view the green light of a loan approval as a green light from our budget. That is false. Financial wellness means knowing what your take home pay is and what percentage of that take home pay is available to be used for loan payments.

"If you’re looking to take control of your financial life and boost your financial confidence, then quit asking for lenders to say yes. This isn’t to suggest you stop borrowing money, although I wouldn’t lose sleep if you did. You will remain in a financially subordinate position if you are constantly seeking yeses and nos." (courtesy of the Indy Star)

Read the rest of my column here.