Tried and True Ways to Control Debt!
Shop 'til you drop--dead of debt!
I heard the phrase, "When you know better, you do better!" And that's right. Do not get me wrong, I like to buy things. The majority of us are consumers, right? We consume. Yet, over time, we tend to over consume and the credit card companies know this, but do we know this? Do we understand our own behaviors? Do we really understand what it means to have debt? Well, this article is my debt reality check story. The way I became aware and conscious of what it meant to have overwhelming debt, yet, still feel like it was just the way it should be.
What is debt exactly? Maybe that is the question I should have asked myself upon graduating college, but it did not matter to me. I had landed my first "real" job so I could pay it off. But, the fact that the salary, at the time, was way below my debt balance did not phase me. I was able to make the minimum payments. I was still living at home. I had no children and hey, I could just transfer my balances over to another credit card without worries, right? I hope you are smirking at this point in the article!
Building Credit with Debt
It was my junior year in college. I wanted to build up my credit history. I filled out an application for a credit card. The rest is history.
They gave me a $600 credit limit! I thought the credit card company was my BFF! I vowed my loyalty to them to infinity and beyond! My first purchase was a pair of shoes for $25. I felt so proud of myself. I waited until I got my student worker paycheck and paid them before the bill even got to me. Those credit card companies would never get me, I thought. I will beat them at their own game, right?
I was well on my way to building my credit history. Psychologically, I was well on my way to establishing my credit life. I had a student savings account, a credit card and my student loan. I was looking really credit worthy now! The banks were so happy to see me coming.
I ended up graduating college with my degree in one hand and five credit cards, with balances, I thought I could handle, in the other. I mean, I just graduated college. I had been offered a job with the same company I had an internship with, for two years, with hopes of advancement, therefore, I had income to pay them off and my credit score was increasing. Win-win, huh!?
A few years later, I was married. My finances and debt became "our finances" and "our debt."
Denial times two.
Our debt reality check began the moment we realized that we bought more house than we could afford; otherwise known as House Poor.
We spent a huge portion of our total income on home ownership; which included mortgage payments, property taxes, maintenance and utilities. Oh, and let's not forget the good old outstanding credit card balances haunting us for years.
The one thing that saved us was the ability to work extra hours to increase our income so that in reality we were able to make ALL our payments without having to default on anything. However, we were suffocating, enslaved and choking on it. Our income was never seen or heard, it was just gone paycheck after paycheck.
We build our credit. We build up our credit worthiness, but at what cost? Our financial peace and security was severely jeopardized. Our financial future was bleak if we had kept on this path.
It was now time to kiss denial good-bye once and for all.
Cruising right along with everyone else. Naivete set in. Our lack of experience, judgment and the belief that accumulating debt was the norm steered us toward more debt.
My credit score increased right along with my balances. It opened up doors for me-so I thought. I was able to buy computers, furniture, cars, and other big ticket items. Sky was the limit?
Then the financial crisis of 2008 set in and we sold our house right before our variable rate loan changed.
"Don't live like the Joneses--they are broke too!"
We realized, the hard way, that living like the Joneses was not living at all. Debt is not a tool to build wealth. Yes, they say, you need to spend money to make money, but what happens when you use money you know you have to pay back, but can not pay it back or it becomes so hard to make the payments that your life is turned upside down just to make the bare minimum payment; resulting in indentured financial enslavement?
Debt builds, for many of us, because we try to meet and even exceed societal expectations of what our lifestyles and material consumption should be like. Again, we all want to live in great neighborhoods, buy quality products, go on grand vacations, dine at the finest places or instantly gratify ourselves with something we like because we tell ourselves we deserve it, and yes, that is okay if you are financially stable, secure and have plenty of liquidity to do it. However, it will cost you and if you are constantly using credit cards and never paying them off then we all know the outcome of that scenario.
The Joneses buy on credit and repay with more credit creating a vicious cycle that in the long run, unless tamed, results in a never ending cycle of debt, stress and lack of real wealth.
We were trying to be the Joneses not knowing the Joneses, themselves, were broke too.
Buying on impulse, using credit cards frivolously, buying more house than we could afford, living like the Joneses and using all our income to pay it all back (or so we thought) were just a few of the old habits or behaviors we eliminated from our psyche to finally get rid of our debt.
Debt became a way of life. Having debt became, what we thought, was what responsible adults do in life. Debt became part of our lifestyle, but were we really living freely? Absolutely not! We were living dead and living in denial. But now, we live freer and although we are not where we want to be, yet, we have incorporated a few lessons learned from our debt reality check I would like to share:
- Lesson #1 : Know what debt truly means! Debt is not your friend. Debt is expected to be paid back. It is the ability to use your future purchasing power in the present. It's a loan with many stipulations and most importantly INTEREST to pay back.
- Lesson #2 : Stop using your credit cards for everything! Our new best friend became our Debit card and now we use the cash in our checking account. If there is no money in there, then nothing gets purchased until there is.
- Lesson #3 : "Wants" and " Needs" are NOT synonymous. We all "want" something, but do we really "need" it--right then and there? Be patient. Hey, I just waited almost two years for Verizon to bring the IPhone to their network and I am using my upgrade credit! Nice. Patience is a virtue alright.
- Lesson #4 : Know how much you owe! In this day and age of free apps, get a free financial app and track your expenses. Write it down. Balance your check book. Get free checking and savings account alerts to your mobile. Know the numbers! I use a spreadsheet and I update it quarterly. In approximately three years, we will be credit card debt free. A few years ago, that number was ten to fifteen years.
- Lesson #5 : No matter how long it takes, build an emergency fund first! Let this be the account that you pull money for EMERGENCIES ONLY (e.g, car issues, glasses, emergency pet care, etc.)
- Lesson #6 : If you are married or in a committed relationship make sure to be on the same financial page with your significant other. I can not stress this enough.
- Lesson #7 : Negotiate your interest rates with your credit card provider. I do it all the time. Call them. Ask them. The worse they can say is no we can not do that right now. If so, wait a few months and call again. It works! Go on bankrate.com for the best rates out there!
- Lesson #8 : Do not be pressured to buy a home if you are not financially ready. There will be time to buy. Home ownership is a great thing, but do not live above your means to say you own. Yes, it builds over time. Yes, it is a huge return on investment, but do your homework and save up for that down payment. Go into the home without heavy existing debt.
- Lesson #9 : Budget everything. Enough said. There are endless budget tools on line to get you started.
- Lesson #10 : Eliminate your debt. Do not consolidate your debt. Consolidation is only a band aid that treats only the symptom.
Compare mortgage, refinance, insurance and CD rates. Expert analysis of home loan finance topics and trends.
Budget, Budget, Budget!
Elaborating on lesson number nine above, budgeting is key for us. We budget everything. Every month and every pay week, we sit down together and manage our money--coming in and going out.
Budgeting is a plan. It plans your savings and your spending. A budget is a tool for debt relief and debt obliteration. Budgets are strategic and organize your financial plan in the present in order to forecast future expenditures and savings.
Once our budget plan was in place and everything was in the open, organized and written down, denial was no longer an issue and the road to financial peace and security was forging ahead.
Reality set in and we are well on our way to achieving our American dream--Financial freedom once and for all.