Friday, June 4, 2010

Monetary Commitments- Be Careful

Photo Credit- Giovanni World
I'll be perfectly honest here- I have not always been the best financial example. At the start of my marriage, and even a little beyond, I made some monetary mistakes that I've been paying for until today. It is specifically because of my previous faulty decisions that I am living extremely frugally by necessity today.

In the hopes of helping you avoid making the same bad move as I have, I wanted to share with you the biggest lesson I've learned on my frugal journey. It may seem simple, but it has enormous ramifications with the potential to change the course of your life.

Be Very Wary of Signing Contracts

When I first got married, I joined the same cell phone company that my husband had been using and signed a contract with them. After about a year, a different phone company offered us an amazing deal if we'd sign up with them. I had asked them if there would be a problem canceling my plan with the previous company and they assured me that there would be no issue with my doing that, and so with that reassurance, my husband and I signed a contract for two phones with this new company.
To our extreme chagrin, we were unable to cancel the first contract we had with our phones without paying an enormous sum in the thousands of dollars for breaching a contract in the middle. There was the same issue with the second company, and hence for the past 3 years (ouch!) we've been paying for 4 phones to two different companies because paying that hefty sum would end up costing more than all the monthly fees over the years. (Yes, we did the calculations.)

Signing that contract with the second phone company without making sure that our first plan was canceled has got to win the stupid award of the century. It has made me extra wary about signing contracts in the future, because sometimes you are verbally agreeing to a contract without realizing it, and sometimes there is fine print that sales people are trying to hide from you. And sometimes you even will have people lying through their teeth to you in the hopes of conning you into another sale.

The other big issue with signing contracts is this:

Do Not Promise Money You Think You Will Have in the Future

"No buying things on credit because you don't have cash to pay for it; don't spend money you don't have" is standard advice given by fiscally smart people.

My lesson I learned and advice given to you is "Don't spend money or commit to paying money on the assumption that you will have money in the future."

Yes, I stupidly signed cell phone contracts with 2 different companies. If I hadn't signed the second contract, but had only agreed to that first contract, I would have been in a much better position now because I wouldn't have been paying all these years for service for 4 phones when I only was using 2.
However, the downside of my having signed even one contract (let alone two!) was that there came a time when I needed to cut back on my expenses drastically, and I wanted to cut the most expensive extras first.
The top of that list was our cell phones- were were spending approximately 100 dollars a month on our stupid cell phones, but because we'd signed the contract, we were unable to cancel our plans. Fortunately, one contract finished already and I switched to a prepaid contract-free phone, but we're still stuck in contract with 3 other phones! (Fortunately two of those three have contracts that finish this July and I'm counting down the days until I can cancel those phones!)

After our rent and cell phones, our single other biggest expense each month was a commitment we made to pay a certain community fund x amount a month for x amount of time. This fund took a loan out because of the promised money they would be receiving monthly from us and from other community members. While charity is a great thing, we committed to paying more than we can currently afford to pay. We were in a better position financially when we pledged that money; we assumed that we wouldn't have a problem paying that amount monthly in the future.
How wrong we were. We are struggling now financially in great part because of that pledged money. We cannot cancel it because it has, in essence, turned from charity to a loan repayment. A loan repayment is not something you can just cut out, even if that loan was to fund  a local charity. In hindsight, I would not have pledged that money. We made a foolish mistake of promising to give money we thought we'd have in the future.

We signed 2 contracts that we cannot cancel at a time where we had more money, assuming that we would have no issue paying that amount in the future. Today, we're paying the consequences for that extreme lack of foresight. I need to cut back on the little things, because the big things are non negotiable because of contracts we unwisely signed.

What now?

Learn from my mistakes please. I urge you- think a million times over before you sign a contract with a commitment. How can you know for sure that you won't have a turn in your luck, that there won't come a point where you cannot afford to stick to your contract, but have no other choice but to keep on paying that money that you don't have?
You can't know that, so be very wary of contracts that entail commitments. I'd even go as far as to say avoid contracts completely, but I know that that is a bit unreasonable as some necessary services are only available with contracts. However, when you sign a contract, just take a good long while and think about it, think how you will continue to pay that money monthly if suddenly your income gets cut in half, or if both you and your spouse lose your jobs, or if suddenly an insanely large unavoidable expense crops up?
I hope that will never happen to you, but its a risk everyone faces, especially with the current state of the economy.
Just be wary of signing contracts. Only sign the necessary ones, and perhaps see if you can sign as short a contract as possible, even if you end up paying extra fees because of it, or if you do need to sign a contract, try to make it as low of a monthly fee as possible.

You don't want to be in the position I'm currently in, having trouble making ends meet because of stupid unnecessary contracts. Learn from my mistakes, and hopefully you will have more success in the financial playing field.

Has anyone had a similar experience making monetary commitments, having your financial situation change drastically, and being stuck with unavoidable expenses that must be paid? 
What was the biggest lesson you learned based on your past monetary mistakes?

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