“To be in debt is to be a slave to those who you owe,” is a quote I heard at a young age, but never quite understood the impact of what it meant. As I was reading the book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely, it now made total sense to me; and it displays some key insights about human behavior in different situations, in today’s world.
As we move further into how technology impacts every aspect of our daily lives, physical money seems overwhelmingly non- existent to most. If you were to ask a Gen Y (20 -35) to borrow a $10 bill, the possibility of them having it is probably slim to none.
As a society we are moving further and further away from cash.
Let’s be honest: we roll our eyes at the grocery store when we see a person pull out a wad of cash and coins or a check book to pay their bill. Why? Because it’s simply not fast!
Technology has played a big part in conditioning us, and our youth, to not to have to wait. Specifically, with that being said, instant gratification is our new “normal.”
In his book, Ariely uses credit card companies as an example since they want humans to move further away from cash. Credit card companies understand that the more emotionally detached we are from cash, the more we will tend to spend.
They also understand that they can make billions of dollars from the interest that they can charge when card holders over spend. To compound that, the average American family has over four credit cards in their household.
What does this all mean?
These facts had my mind racing both as an advisor and having a family of my own; and I began to wonder…what was the cost of discretionary spending on a credit card?
I was always told growing up, “don’t spend what you don’t have,” and--we, by all means--try not to. But who hasn’t used credit when they are in a pinch or submitted to the thought of making a wide-eyed, toddler happy who “needs” a $200 Barbie dream house?
We budge, give in, and swipe the plastic. But at what cost? As an advisor, when reviewing my Client’s finances, it is not uncommon to see balances that aren’t paid off monthly, and what that means is that the total cost of a transaction has increased by the amount of interest being charged (interest rates can be as high as 29.99% APR).
The fact that credit card companies are making billions of dollars off interest alone indicates that consumers are not paying off their debts, and that their need to have “things” immediately outweighs the pain of paying for those items at a premium cost.
As consumers, we know this information, but in order to be better we must be proactive, and budget accordingly, so we don’t fall into the trap of paying high interest rates.
A great way to start: pay yourself/your family a set dollar amount each month, taking those dollars as a percentage of Net Spendable Income--after gifting or tithing, and savings-- and use it as free money to spend on whatever items are “necessary” (or not) for that month.
This guarantees that the purchases are paid for, and no interest charges are added. And overall, be patient in deciding what is a need, and what is a want in your life. The immediate satisfaction may not always overcome the burden of additional expenses later.