photo credit: Photos8.com
Being Good With Money Can be Boring!
We all know that we need to budget, watch what we spend, and not put things on credit. Sometimes this can just seem a little bit dull and depressing! You start the month feeling sure that there will be some money left at the end for a nice meal out/some new clothes etc. but gradually the money goes on other things. The car needs to be repaired, the children need new shoes etc. etc.
Temptation is Always There….
This is when the temptation to put things on credit can be very great. The card that you haven’t used since you got it has 2000 available to spend with zero interest. The feeling of being freed from your monthly budget is brilliant. Yes you can afford that meal in an expensive restaurant, the latest techno gadget, or a trip to the theater.
But the Punishment For Taking on Debt is Swift
Take this path and the feeling of freedom won’t last for long. You will hit the limit on your card, the introductory interest rate will end landing you with a hefty monthly bill. Suddenly you are back to funding your spending out of your monthly budget, only now you have even less money to spend each month.
Is There Ever a Right Time to Take on Debt?
So when should you be funding purchases from debt? I think that you should only use your card if you know you can pay the balance off in full when the bill comes. On very rare occasions it might be worth making a big purchase (e.g. a vacation) on a card if you know that you can clear the balance over a couple of months. To use your card in any other way is to make yourself permanently poorer.
Tags: credit advice, Debt Advice
photo credit: Nexeus Fatale
What is a debt spiral?
This is when the interest/repayments on loans reduce your available income so that you have to borrow more and more each month to keep up. It is a downward path that leads to serious financial problems and even bankruptcy.
Example
A family has a monthly income of 2000. Their monthly essential outgoings total 1500 so they have 500 each month to spend on non-essentials or to save.
They decide that they just must have a new car, the monthly cost is 300. They now have 200 each month to spend/save.
As they are working really hard, they feel that they deserve a holiday and put the 4,000 cost on a credit card. Monthly repayments are 200. They now have nothing left to spend each month.
But people can’t live without their little luxuries so they eat out and go to theme parks with their children and increase their credit card debt to 8,000 over the next year. New credit card repayment is 400 and they are now running a monthly deficit of 200.
If nothing is done about this situation the debt will grow more and more quickly as it compounds up/is added to. This process will only stop if the family realize that they need to take action or they are refused further credit. In the latter case the door to bankruptcy is open!
Be on Your Guard
The point of this post is to realize that the start of the debt spiral won’t seem like a problem at all. In fact it could seem like a really great day. You’ve rewarded yourself for all your hard work with a new car. That foreign holiday you’ve always dreamt of is now a reality.
If you are tempted to put luxuries/treats on credit then consider this thought:
“If you can’t afford the lifestyle you want now then how are you going to be able to afford it when you have extra credit bills to pay”?
Taking on credit when you don’t need to is stealing from your future. Consider the following rule:
“The only way to become wealthy is to spend less than you earn and invest the difference”
You should be able to clearly see that doing the opposite (spending more than you earn and borrowing the difference) is a certain way to being poorer in the future. Always ask yourself if you really need something before you buy it. Never buy large purchases on an impulse especially if they are going to be bought on credit.
Tags: Debt Advice, Debt Problems
There are lots of resources that will tell you that making a budget is important. There are even lots of tools to help you do it. Make no mistake, preparing a proper budget is crucial to anyone wanting to improve their finances. This is true whether they are looking to get out of debt or invest for the future.
Without a budget you are not in control of your finances and have no way of measuring your success or failure
But all of the information and tools about preparing budgets are missing the point. Do people get into debt because they don’t understand that they are spending more than they earn? I don’t think so.
Preparing a budget is the easy part. It is sticking to it that is difficult.
I can relate a story from my own slide into debt problems that illustrates the point. A long time ago I made the effort to total up all my expenses and income. I worked out how much my wife and I had to spend on “fun” things and decided to keep track of this by the extremely high tech method of keeping this money in an envelope each month. One day nearing the end of the month we were shopping and my wife wanted to buy lunch in a restaurant. I said we didn’t have the money (trusty envelope in hand!) and we had an argument about it. In the end I gave in and we bought lunch on our credit card. Our collective weakness was a sign of things to come.
There is a reason why lots of people give advice on making budgets but not so much on sticking to them. That’s because one is simple and the other is very hard and complicated.
No money management tool will solve your money problems for you
Sorting out an addiction to spending is like dealing with losing weight or a chemical dependency. The motivation for it needs to come from within. You need to spend time thinking about why you want to spend money - is it to make up for low self-esteem or is it the result of problems in your past or even the way your parents managed money? Understanding the reasons behind your desire to spend and addressing them is the real key to solving your debt problems. Once you have done this then you can use any method for calculating you budget - a spreadsheet, a web-based tool, the back of an envelope! It really doesn’t matter once you have discovered the motivation to sort out your money problems.
A lot of advice also ignores the uncomfortable fact that many people are not in debt because they spend on luxuries. They have problems because they cannot earn enough for essentials or because of medical emergencies.
Have you had money problems and overcome them? What was your motivation to do so?
Tags: budgeting, money advice
