Nancy is 28 and attractive. Every time we catch up for a drink, it’s funny to see the guys and girls all stare at her. The guys look at her and think, Dayum! And then they look over to me and think, What the hell?! The girls on the other hand just check out Nancy from head to toe and don’t even pay me any attention. Long straight hair, longer legs, and delicate features does that to people I guess.
I’ve known Nancy since she first graduated from college. She reached out through our college alumni network for work advice. Although she didn’t make it past the third interview at my old firm, I did give her some tips and introduced her to other personnel that eventually led to another job. We kept in touch and became friends.
As attractive as she is, Nancy revealed to me that she feels ugly. Do you know those already stick thin folks who consistently tell their friends they need to go on a diet? Nancy is somewhat like that with her looks. With her insecurity, Nancy ends up buying some of the most expensive clothes and accessories on the planet. The LV handbag she carried the last time we met cost over $3,500 alone!
I guess with a $6,500 a month gross salary, she can afford it. But, what about the 25 handbags she admitted to already owning? As we talked more, she told me she has over $25,000 in credit card debt and feels the only way out is to open up new 0% balance transfer credit cards to prevent her from getting into more debt.
It was a strange conversation because clearly, the best way to get out of debt is to not spend more money. However, to Nancy she felt stuck in a negative debt cycle where spending made her feel beautiful, if only for a little while until she had to spend some more.
THOUGHTS ON WHY PEOPLE SPEND MORE THAN THEY MAKE
* Self-Esteem: When we lack self-esteem, we turn to things that make us feel better about ourselves. In Nancy’s case, clothes and accessories made her feel pretty and therefore she continued to spend to keep herself temporarily happy. We are bombarded on a daily basis by how society thinks we should look and dress. The fact of the matter is the TV and movie industries purposefully choose the most attractive people who barely exist in our daily lives. When all you see is someone really attractive, really wealthy, or even really good, it’s inevitable we start feeling inadequate.
* Desire: Desire leads to suffering. When I was 10 years old, I finally got a pair of $40 Reebok tennis shoes I begged my father for so long. I thanked him profusely and told him I can’t believe people spend so much on shoes so regularly. He then said, $40 shoes have always been around. There are $100 and over shoes too! I realized then that desire is never ending if you don’t draw a line and cut things off.
* Keeping up with others. It used to be that you’d see your neighbor’s new car and want to buy a new car yourself. Now with Social Media, you get to keep track of all your friend’s great lives. You know, the updates from the Maldives, or skydiving in Spain. We’re now bombarded more than ever by people who want to share with us how great their lives are. As a result, we need to do the same, or else we start feeling inadequate. The best thing to do is to shutdown the constant checking and reflect on what you already have.
* Lack of knowledge. People don’t realize how expensive consumer debt can be. With mortgage interest rates falling to record lows, it’s a curiosity to see credit card interest rates still average in the high teens! If you pay a 15% credit card rate and pay the minimum each month, your credit card debt will double in five years! If you pay a 20% interest rate, then expect a doubling of debt in only 3.5 years. The miracle of compounding works equally as well in reverse. There are people who don’t realize that if you pay $500 off your $1,000 credit card bill on the last day, the credit card company will still charge you the one month interest on your entire $1,000 balance. Know the rules consumers!
* Easy credit. Despite income inequality, there is social equality. Anybody with a pulse can get a credit card with a thousand dollars line of credit nowadays. Heck, credit card companies are marketing their cards to students who most don’t even have a steady income! If there is a plate of French Cruller donuts, I guarantee you that I will eat at least one. Easy credit leads to problems.
* No budget. If you don’t know how much you make after taxes and retirement contributions, then you don’t know how much you can spend. The first budget is a PITA, but afterward, everything becomes automatic.
LOGIC IS NOT ENOUGH
Everybody except for the government knows that spending more than you make for an extended period of time leads to financial failure. Yet, there are trillions of dollars in revolving consumer debt outstanding. Life is too easy in developed countries. We become soft, indebted, and lazy, just as creditors want us to be.
If you go to India, where microlending is becoming big business, research what their default rates are compared to the US. Default rates are way below industry norms because each person recognizes how difficult it is to get credit, cherishes the credit for a better life, and does not want to disappoint his/her village which is depending on such loans and future loans!
We need to understand how good we have it. Do we really need the fourth pair of designer jeans or a new car after only three years when the majority of the world can’t even afford to pay cash for the typical $21,000 Honda Civic?
If we can visit developing countries to gain more perspective how luxurious our lives are in developed countries, I’m positive we will be able to reduce the act of spending more than we make significantly. Imagine a world where nobody welched on their bills because they reached their financial tipping point? There would be no housing crisis, no financial crisis, and no need to risk our respective country’s economic futures.
RECOMMENDATIONS TO BUILD WEALTH
Manage Your Money For Free: You don’t have to be rich to manage your money. You can take action by signing up for Personal Capital, the #1 free financial tool to help you track your net worth, manage your expenses, analyze your investments for excessive fees, and plan for your retirement. Ever since signing up in 2012, I’ve been able to grow my net worth by over 100% because I know exactly where my money is going. Once you have a plan, it’s much easier to achieve your goals.
Refinance Your Student Loans: SoFi is one of the leading new financial technology companies based in Silicon Valley that not only reviews your credit score and income/debt ratios, but also looks at the quality of your education and quality of your work institution. If you’re right out of school, you’ve got a lot of upside, but perhaps your finances don’t look so great at the moment. That’s where SoFi can really offer lower rates because banks and government lenders can’t look at individuals holistically. Check SoFi out for a lower interest rate.
Refinance Your Mortgage: The Federal Reserve is planning to raise interest rates in 2016 and beyond after seven years of keeping interest rates close to zero. If you haven’t refinances in a year, or are thinking about buying a property, lock down a low interest rate now by at least checking with LendingTree to see what’s available. LendingTree has one of the largest networks of lenders that compete for your business. When banks compete, you win!
Updated for 2016 and beyond.