There are a million and one opinions about bankers and what they do. Some believe they are leeches feeding off debtors, and others think they provide a valuable service to their customers. Whatever you believe, you can’t deny that bankers see people at their best and worst financial positions.
They watch people go from broke to wealthy and back to broke again, and they certainly have a few stories to tell. This article explores four critical lessons to take away from bankers and their experience with people’s finances.
Don’t buy a house you can’t currently afford.
You hear this piece of advice so often that it’s a surprise people still ignore it. Often, buyers believe they need the home for an arbitrary goal they made in their minds, like flipping it for a profit when the economy picks up. Other reasons include giving their kids a place to grow up or buying because it’s on sale.
There’s an old rule of mortgage that works very well in this situation — don’t buy a home that costs more than 2.5 times your annual income. Sticking to this rule ensures you can make the payments and live to tell about it.
If you make a lot of money, try having a lot of assets, too.
Bankers see this all the time with people who make $1 million or more annually. They don’t have assets that actually boost their net worth. Instead, you see over $400 000 in furniture and automobiles — these are depreciating assets that do nothing for the net worth.
If you make a lot of money, it doesn’t count unless you have a lot of money left over or a lot in savings or investments. Or, at least, pay your taxes. With tools like Taxfyle sales tax calculator, there are now fewer excuses to avoid paying taxes than ever.
Don’t kill the golden goose.
The story goes that there once was a farmer who had a goose that laid golden eggs. The farmer eventually got impatient waiting for the goose to lay eggs. He decided to open up the goose and take all the eggs inside. As you can imagine, he killed the goose and his fortune along with it.
People often try to get loans to invest in an uncertain business. As collateral, they stake their homes, business, and other assets, all in hopes of an immense fortune. If you have assets valuable enough to be collateral, they are your golden geese. Please don’t kill them in hopes of more eggs.
The bank isn’t out to get you.
It’s surprising how we tend to assume that the banks are evil and that their sole purpose is to ruin customers’ credit. But then, bankers tend to come calling when you can’t make your payments or default on your loan. Financial institutions are notorious for being loss-averse. They’ll do anything to avoid losing money.
If your loan looks like a loss, you can expect them to do everything in their power to get their money back. There’s no invisible hand trying to take your hard-earned money. The banks are merely protecting their interests.