Everywhere You Don't Want to Be

I read this article this morning, which has just resulted in the following ramble:

As a society, America is totally driven by it's desire to own stuff.
Okay, let's clarify that - not really own stuff but possess it.

Americans live their day to day lives borrowing money for everything from cars to clothes to cookies at McDonalds. We flash credit cards around like the expense we have just incurred is somehow magically deflected or eliminated by these plastic shields. We spend recklessly today, without ever giving much thought to how we are going to pay for it tomorrow or in years to come. We live so caught up in the moment that we fail to see how our present spending is dramatically affecting our future lifestyle, or lack thereof.

When did common sense vanish into thin air?
Is it no longer culturally acceptable for a person to actually have a budget and actually live within it?

If you take a look around you, it becomes readily apparent that our society is geared for instant gratification and delayed payment. No down payment, no payments for 90 days, no interest for a year... The list of such promotions is seemingly endless. However, at some point the spending spree must come to an end. There will come a time when we will no longer be allowed to sign on the credit line and we will be forced to sign our check over to the credit companies.

Do Americans think of debt as something that should be avoided or as something that they are entitled to? My experience leads me to believe that a lot of Americans feel that they have earned the right to charge whatever they want to their credit accounts. Culturally, it appears that having large amounts of debt is now the rule rather than the exception and it seems as if the amount of debt that is considered normal continues to increase year by year.

How long can we finance our present lifestyles with the extremely high cost of our future survival? We want to own the newest cars, gadgets and clothes right now, without ever attempting to fit them into any sort of basic budget. We never wonder where the money will come from to pay for all of this stuff because we have the ability to swipe the payment to next month. And that is where the danger grows into a life-threatening monster. People will "purchase" many times more than what they need or could ever afford to pay for in one month because they see a little line on their credit statement that says minimum payment due.

So that's what a lot of people do. They pay the minimum payment every month, thinking that they are paying off their debt. In all actuality, they are merely paying off the interest of that debt. If you never pay more than the minimum, you will never be free of the debt. For instance, if I buy my wife and I lunch at McDonalds and swipe my credit card to pay for it, I have just incurred a debt. I didn't have cash and we were hungry and Mickey Dees is so customer friendly that they are willing to allow me to pay with my card, so we happily took on that debt in return for some beef and fries. Let's say the total cost of our meal was $10. No big deal right? That depends.

If we immediately pay the full balance off, then we have essentially not acrued or had to pay any interest on that meal. So basically, we have had thirty days to pay for our $10 meal, which is nice since we didn't have any cash at the time. However, say things were a bit tight financially or we just always pay the minimum payment every month, and this month that equals $2. We pay that amount and continue to live our Happy Meal lives thinking that we will have the balance payed off in 5 months. But we won't. Oh no, not by any means.

A lot of credit cards have interest rates of between 20 and 25% or more on balances remaining at the end of the month. For our case, we'll say the rate is 20%.

We pay the minimum, which leaves our balance at $8. The interest on that balance is $1.60, which brings our new balance to $9.60. We pay the $2 minimum again, leaving our balance at $7.60. After the $1.52 in interest is added to that, we have a balance of $9.12 remaining. For the third time we pay the $2 minimum, leaving us with a balance of $7.12, which is charged $1.42 in interest, resulting in a balance of $8.50. In three months of paying the minimum payment, we have reduced our initial $10 in debt a full $1.46 to $8.54. In that time, we have already payed $4.54 in interest alone. We have almost payed half of what our original meal cost us in interest alone.

And that, ladies and gentlemen, is a very simple scenario of how people find themselves drowning in debt. They don't set out to go deep into debt. They figure "We can pay that off really quickly". The major mistake in their reasoning is that they do not take into account the interest rates and amount that they will pay in interest if they do not pay the amount off in full every month.

My example was very simply in nature but it helps illustrate a huge problem in our culture. What if we paid for McDonalds using our card one time a week, incurring $50 a month in debt? What if we used our card to eat out at fine restaraunts twice a week? What if we bought groceries and purchased gas using the card? Suddenly, we are not talking about simply $10, we are talking the possibility of hundreds of dollars of debt every month.

In my example, I did not figure in if we ate at McDonalds once a month every month on the card and paid the minimum. After paying the minimum the first month, we would have a balance of $9.60 (interest included). Add $10 more to it the next month and we have a balance of $19.60. We pay the new minimum of $3, temporarily reducing our balance to $16.60. After adding back the $3.32 in interest, our balance is $19.32.

As you can see, month to month we are incurring more debt that we are not paying off. In doing so, we are allowing the interest to accumulate rapidly. In essence, if we do not pay off our first month's balance by the end of the second month, we are charging ourselves even more for the meal. Over time, anything we charge to our credit cards has the potential of costing us over three times what it originally cost us - if we only pay the minimum amount. That is a lesson that a ton of Americans would be better off to learn sooner rather than later.

Is it possible to live happily in such a possession based society without incurring such debt? You bet. It takes disciplined spending, an operating budget and a little touch of common sense. It also takes the willingness and the willpower to not buy that new gizmo you want or hear all the raving reviews about. It takes parents who can tell their children "No, we cannot afford that." and stick to their guns. It takes children who are brought up to appreciate and understand the value of money, how it is earned and most importantly how to spend it wisely.

Would it be possible for an American to live a full and happy life without having such huge amounts of credit card debt? My premise is that there would be more genuinely happy Americans if they weren't ever allowed to swipe their cards in the first place.