Pimp Your Finances

On September 23rd, 1999, the Mars Climate Orbiter made its final descent to the red planet.  The satellite had just finished a ten month journey, and was about to begin transmitting data.  It should have been a moment of celebration, but the probe was never heard from again.  Something had gone terribly wrong.

The problem?  Engineers failed to convert measurements to the metric system.  The mistake was simple, but wasted almost $328 million dollars when the satellite burned up in the atmosphere.  The loss of time was just as devastating.  The orbiter was part of a ten year project, and Mars probes can only be launched every twenty six months when the planets are at their closest.

What does this have to do with personal finance?  The answer is simple.  While our financial mistakes are not normally of that magnitude, they are just as preventable and can be just as devastating.

A momentary lack of caution can change your life

 (image by Shuets Udono)

Financial mistakes are preventable

Ever been late on a credit card or bill payment?  You’re not alone.  Most Americans – myself included – have been late on a payment, but that doesn’t mean it’s OK.  There is no excuse for missing a payment, ever.  It can be hard to keep track of all your bills,  but the solution is simple; write them down.  I use a spreadsheet to list my bills for the next two months.  Another way to track them is to buy a big desk calendar.  Every time you get a bill in the mail, write down how much is due and when.  Then check the calendar once a week, and nothing should slip by you.

By planning in advance, it makes it easier to remember everything, and also to plan your budget.

Financial mistakes are costly 

Late on electric or water bills?  Most utility companies charge a penalty of 10-15%.

Overdraw your bank account?  Be prepared to pay an average of $29 per transaction.  Doesn’t sound like much, but according to a study from the Department of Economics at ECU, the median interest rate for overdraft fees and so-called “bounce protection programs” offered by banks is an astounding 4,547%!  Additionally, because these programs and fees are not loans, banks are not required to disclose information about their costs.

Miss a credit card payment or go over your limit?  You can plan on paying an average of $34.09 for being late or $36.53 for going over.  Worse, payment history accounts for 35% of your credit score.  Missing even one payment can lower your score.  If you’re behind by thirty days, most companies consider you delinquent.  Miss three payments in a row, and they assume you’ll never pay your account, and your credit score will suffer.

Financial mistakes can take years – or even decades – to correct

Information about your financial history stays on your credit report for seven years, while declaring bankruptcy will be on there for ten.  Worse than that, your credit rating can affect all areas of your life.  Everyone from lenders to employers to insurance companies check your credit report, and it doesn’t stop there.  Recently, even hospitals started checking your credit .

The biggest impact that your credit history can have is on loans.  When applying for a loan, the higher your credit score, the lower the interest rate you’ll be able to get.  On average, people with the best credit scores – 720 or above – would currently be eligible for a 6.024% thirty year fixed loan, while those with the worst – 599 or below – would pay 12.985%.  Over the course of a thirty year, $200,000 loan, that’s a difference of more than $362,000!

Even a small difference in your interest rate can have a huge impact.  A difference of .25% will will save you $23,408 (on a thirty year $200,000 loan).  It may not seem like much, but it would mean an extra $65 in your pocket each month.

An ounce of prevention is worth a ton of cure

The Mars probe failure was costly, wasted years, and could have been prevented by simply double checking the details.  Financial mistakes are no different.  Make sure you take the time to check your bills and due dates – you can’t afford not to.