Why Do We Spend?

I suppose the first step to understanding why we find ourselves in massive debt is understanding that we are in a country where consumption is king. How many times have we heard that our economy is a consumption economy? The trade deficit really doesn’t matter! And I won’t sit here and say that consumption is inherently evil. It most certainly is not. Everyone consumes. However, the different ways in which we consume are strikingly different. Do you know anyone who fits into this mold?

Debt is normal. Everyone goes out and buys a plasma TV for their living room by signing up for a Best Buy card. So, what?

Yeah I put my new Mercedes on a six-year note. I know my company is down-sizing but I am positive that I am irreplaceable!

We could not pass up the house! It was a steal!!! In ground pool, pool table, marble counter-tops, everything we wanted! It was worth the piggy back mortgages!

These people are pretty much naive to the fact that they are spending beyond their means. There are times when a six-year note on a car makes sense… like if they give it to you for 0% interest. But that ain’t happening and thus you are costing yourself a fortune to over-leverage your income.

You are in denial.

What are the warning signs of too much debt?

People who have too much debt do not always realize it. It isn’t like some uneasy feeling or nervesness overcomes you. It does for me but that is because I have full-knowledge of where I stand. A lot of people have no clue where their finances stand, though, and thus do not even realize how bad their situation is!

Here are a few questions to ask yourself in order to see if you have too much debt:

• When you make your credit card payment, are you frequently only making the minimum payment?
• Do you not know your financial standing? Can you not enumerate what you own and what you owe?
• Is it difficult for you to sign your own loan? Do you need to ask for a family member to co-sign in order to get approved?
• If you were to be laid off from that job you thought you were irreplacable at, would you be in a dire situation?
• Do your current debt payments make it too difficult to save at least 5-10% of your gross income?
• Do you float checks (writing a check even though you know you don’t have the money… hoping the person cashes it after you have deposited an expected payment)?
• Do you find yourself at pay day advance locations often?
• Have you ever had to borrow money from one lender in order to pay off another lender?
• Are collectors beating down your door, yet?

If you caught yourself mumbling “yes” or nodding your head along with one or more of these questions, you might be carrying too much debt. If you found that you were in agreement with more than one or two of these, you may need to take a step back and really evaluate your situation.

How does this debt accumulate?

Once you realize you are in debt, you need to evaluate how you got there and why.

In college and when I first graduated, a lot of people I went out with had no clue about the value of money. They would pay for  lunch at Chipotle on a credit card. Once you get up from the table and leave…  all the burrito is intrinsically worth is the 2 pounds of food in your stomach. You have put $6 on credit and have left with something of $0 in value. If you are like me and pay your credit card every single month, then this does not matter. You are only paying $6 for that $6 burrito. However, if you do not pay off your cards each month then you are continuing to pay for something that you never get to use again! When you consider that fact, that you could be paying for a nice dinner for months, seems kind of silly, right?

Everyone’s thought process in this step will be different. You may need to budget in order to figure out where you are going wrong, but that would be a huge step in the right direction. I would even wager to say that a man who has a budget but is in debt is better off than a man who does not have a budget and is living paycheck to paycheck. What do you think? I think that is perfectly reasonable as the man with the budget has a better chance of turning his life around.

How to end the cycle of debt?

The easiest way to fix this problem is to pay off your credit card every month. You have consumed the item this month it should be paid for this month. When you take a step back and ask yourself “Why should I consume _x_ this month but pay for it in the future?” it will become pretty clear that you can seldom give a legitimate answer to yourself. If you can’t answer that question to yourself then that tells you it should not be paid for using credit.

If you have a hard time controlling your spending you should create a guilty pleasures account.  Each month give yourself an allowance for your guilty pleasures whether it be for Chipotle or video games. The choice is yours. However, once the money is gone that is it! You must remain disciplined to form good habits. I do not do this because I never find myself spending money frivolously but this is an important step for many people to reign in their spending bouts.

Also, do not fall into the trap “Oh X and Y expenses were emergencies!” A lot of the times that is you purely rationalizing for your mistake. To avoid doing this create an emergency fund. Or a rainy day fund. Or a getting established fund. Whatever you want to call it, start it now.  That will curb your need to charge emergencies. When an emergency arises you can pay for it in cash. If it is truly an emergency, you won’t think twice.

That’s it!

Over the following months I will be going over more ways to conquer debt and keep it line, but I thought this would be a good place to start. What do they call it? Stage 1: Denial?