“You can’t always get what you want,” should be a truism, and yet most people do whatever they can to circumvent a very necessary moral lesson. Or maybe, “You shouldn’t always get what you want,” would be a better lesson. For decades now we’ve been watching personal debt climb to astonishing heights. The simple truth is that people are borrowing money to buy things they don’t even need, and then paying exorbitant interest.
People look at debt in a way that’s almost the exact opposite of the way they used to. Credit cards are a relatively recent invention, and despite the fact that people have pretty much always had debt in some form or other, their reasons for incurring that debt have changed drastically. People used to put things on a tab at their local general store or tavern. A tab was paid off later, and interest was something primarily dealt with by banks. Even the banks were different back then, but this article is going to deal mostly with personal finance in a way that should pretty much leave the banks out of it, except to explain how banks can be kept out of it and why.
A few decades back, people incurred debt only for the absolutely essential things in life. Like food, clothing and shelter. They didn’t put themselves in debt for things they didn’t need. Mortgages have been around for a while, but housing is a necessity. Also, housing and vacant land prices have increased so much that they’re out of sync with our incomes. These days we almost have no choice but to put 90% of our house purchase on a mortgage. There are ways around that, but most people are unwilling to make the necessary sacrifices to do so.
However, when we go to the local mall, which is a recent innovation in itself, we start window-shopping. Then we start wanting things. Sure, they display items prettily, but nobody said we had to do more than appreciate the aesthetic value of those displays. Nobody said we were required to spend several hundred dollars on shoes or electronic equipment that we don’t actually need, because we already have nearly the same thing at home. There’s absolutely no reason not to reward yourself for being a hard worker if you can afford it, but if you have to go into debt to make luxury purchases you need to change your spending habits.
These days people seem to feel like fools for putting groceries on their credit cards, yet have no trouble with the idea of handing over the plastic for something they have absolutely no need for. It’s a dramatic shift from our former spending habits, and that shift is causing untold amounts of destruction. We live paycheque to paycheque (or paycheck for American readers), paying minimum monthly balances on debts with around 17% interest. Then we let necessary bills lapse for a while and end up paying interest on those, sometimes in addition to late-payment fees.
If you look at your most recent credit card bill, can you remember exactly what last month’s remaining balance was used for? Or have you carried a balance on your card for so long you’re no longer sure how much is left to pay on the big-screen TV you bought a year ago, or what else might be mixed in with that? Have you ever calculated exactly how much that TV cost you and compared it to what it would have cost if you’d waited a few more weeks and paid cash for it?
See, that’s the trouble with buying luxury items on credit cards, particularly with the justification of a sale. Even at 50% off, a sale is not a sale if you end up paying twice as much in the long run. A sale isn’t a sale (even if you pay in cash), if it wasn’t something you were going to buy in the first place. You didn’t save $500 with that 50% off. You paid $500 you weren’t planning to spend. This is especially true of things we already have in abundance. Purses, gadgets, you name it. If it’s not on your list of things that you’re out of, and actually have a real need for, you’ve overspent no matter how good the sale was.
One of the biggest criticisms of cash-only spending has to do with the economy. People try to argue that spending more money is good for the economy. Now, think it through for a minute. Would you be pumping more, or less, money into the economy, if you weren’t paying interest on your credit card bills? You might be spending more money with credit card debt, but it’s not going into the economy. It’s going to your bank. Is the bank putting money back into the economy? Will it be putting more money into the economy based on its income? The answer to the first question is a qualified yes. Banks hire people, pay wages and invest money. However, the second answer is mostly a no. They tend to hang onto every little red cent, keeping it in their own coffers. Rich people profit when banks profit, not middle-class and poor people. Banks are not out there buying groceries from a local mom-and-pop store, which in turn gets them spending money that goes directly into the economy. Contrary to popular belief, and as shown by what happened in Iceland just a few years ago, banks can go bankrupt without destroying a country. They don’t need to have a stranglehold over the economy.
If you want your money to have a positive impact on the economy, retaining a balance on your credit card is not the way to do it. It’s fine to use your credit cards for convenience, but if you can’t pay off the balance when the bill comes in, make sure that balance doesn’t include anything that isn’t absolutely vital. Paying off household bills with a credit card is an iffy proposition as well. The interest you pay on overdue utility bills depends on where you live and whatever laws are in place to protect consumers. You don’t want your utilities cut off, of course, and not just because it’s extremely inconvenient to do without them – usually there is a re-connection charge that makes putting it on a credit card worthwhile, particularly if you pay off the credit card before any interest accrues.
When it comes to paying off high-interest debt people also tend to forget one key advantage they might have. If you have a mortgage, you might want to consider rolling all of your credit card debt into that. If you’re like most people you shudder at the thought of increasing your mortgage, but think about it logically for a minute. People go nuts trying to pay down their mortgage by making extra payments whenever they can, but chances are your mortgage has the lowest interest rate of any loan you have. It’s silly to have 17% interest on any debt, when it can be rolled into 7%, or whatever the going rate is for your mortgage. It may seem like a huge mistake to increase your mortgage, but it’s not. Once you’ve gotten rid of your high-interest debt, then you can worry about making a dent in a low-interest mortgage. Besides, if you can’t get a handle on your credit cards, you’re much more likely to experience financial difficulties further down the road, which increases your risk of someday losing your house.
When it comes to houses and cars, however, there’s a caveat: Don’t buy more house or car than what you really need. If you can lower your mortgage to $1,000 a month from $1,400, you can get a lot of little luxuries for that extra $400. Make sure your justification for a larger house or more expensive car is legitimate, rather than getting excited about how much it’s going to impress someone else. If you want an extra bedroom because you work out of the home and need office space, that’s logical. If you want an extra bedroom because everyone you know has a house with four bedrooms, you’re wasting your money. That’s when you may find yourself in the unenviable position of being house rich and pocket poor. It’s also a good way to go bankrupt and lose the equity you’ve put into your home.
Cars, on the other hand, are a constant drain. They go down in value, their upkeep is high, and the monthly expenses like insurance and fuel can be terrible. If you need a car then the smartest thing to do is pick one that truly suits your purposes. Some people need a pickup truck, while for other people it’s nothing more than a gas-guzzler. However, do yourself a favour and pick a reliable vehicle. Do some research. Sometimes it’s better to be making a car payment than spending money every month in repairs, particularly if an unreliable vehicle will cost you hours at work.
As any good parent knows, you don’t give in to the whims of a toddler when they want that candy bar at the checkout counter. It’s a bad idea to teach them that it’s okay to throw tantrums, and that they’ll get everything they want if they do. It teaches them to indulge their need for instant gratification, and that’s exactly what we’re doing when we go into debt buying luxury items. Unless it’s a house or a car, you probably don’t need to be borrowing money to pay for it. If you’re really broke and need food, that’s an acceptable purchase and not something you should be looking down on yourself for. That’s what credit cards are supposed to be for – emergency, short-term expenses, just like running a tab at the local general store.
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