I am an opponent of consumer debt because the interest rates that credit cards charge are usurious when compared to the government bond yield of ~2.8%. If you are going to use a credit card, please pay it off in full every month or you’re just lighting your money on fire. This ain’t Vegas where everybody is making it rain in the clubs you know!
We probably shouldn’t be living it up while still deep in consumer debt if we want to achieve financial freedom. But it’s just so hard when we’ve got our parents, government bailouts, rich friends, and wealthy spouses who will take care of us if we go overboard. Paying $4 an hour for parking with my credit card doesn’t feel so bad. But when I’ve got to load up the meter with 16 quarters, damn, what a ripoff! It’s only natural to want what other people with means have, so we spend since it’s so easy.
One of my readers called me out on my assumption that indebted consumers consciously spend beyond their means. Is it so bad for me to assume a mugger isn’t threatening to chop off your pinky if you don’t buy yourself $1,000 Christian Loubotin pumps or a $8,000 Panerai Submersible watch? I think so, but here’s a fantastic perspective by “GetAGrip” which I thoroughly appreciate.
DEBT CREEPS UP ON YOU LIKE A CLOWN IN THE GUTTER
The assumption here is that most people wallow in the debt and happily and knowingly take it on. That’s not what I’ve seen happen. What I did and what I’ve seen is that is creeps up on you, in part because of naive ideals or just lack of experience. Things happen slowly to many young adults, often over many years, until they hit a crisis.
For example you may figure, as a naive twenty plus year old, that a bank wouldn’t give you a loan you couldn’t afford because that would be a bad risk for them and they’re not in the business of taking bad risks. Or when the finance guy at the car dealership looks at your monthly salary and says you can easily afford that car you’d like, you buy into it because they are all nice, decent people and wouldn’t just be stroking your ego to make a sale. Then when you add up your salary at the end of the month and compare that to your bills, guess what? You CAN pay them all.
So what’s the problem! You are being a responsible adult, paying your bills and debts. Sure, maybe you couldn’t pay off all credit card bill this time, but you paid more than the minimum, and you’ll get it knocked out next month. Sure, sometimes you do the credit card juggle using one card to pay the other, but your tax return is coming soon and that’ll help and generally you’re living fine.
You have no real worries. You are enjoying your life and retirement is like, forty years or more away. You could be dead way before then so why sweat it.
But then you need a root canal, and you find your insurance doesn’t cover that, and it’s $2000 when it’s all said and done. Soon after, the newer car is doing fine, but your spouse’s older car needs $1500 in repair work to pass state inspection. And since I mentioned spouse, did I mention you might still be paying off the wedding and honeymoon? After a few years of this you find that…
Yes, you can STILL pay all your bills, you may even be able to save a little because you got some promotions.
But the debt has risen from a few thousand to maybe a few tens of thousands and while you aren’t really worried, you are having trouble understanding how it got so big. Then you get the first real wake-up call. It could be that you lose your job or someone is pregnant or you simply were doing the bills and realized how much money you’re spending and it’s more than your parents ever earned in a year.
That is how I’ve seen it work for most people. Many are living just a bit beyond their means and seemingly living fairly well, but not really saving, not really investing and it isn’t until a crisis of some kind hits that they start to come around. Otherwise they continue to live, paying their bills, saving a little, sliding deeper and deeper into debt, but never really seeking financial independence because they’re managing and in their view, doing just fine.
LIFE JUST HAPPENS WHEN WE’RE BUSY LIVING
Although I’ve never really had any revolving consumer debt, I’ve made loads of financial mistakes that have caused me hundreds of thousands of dollars in losses that is like getting into huge debt. For two years from the beginning of 2009 to the end of 2010 I shut down my spending out of grief and guilt. Life just happened where I decided to live it up and buy a vacation property. Life just happened where I just had to roll in a Mercedes G-Wagen as an immature 25 year old until my financial world took one massive uppercut to the chin once Lehman Brothers collapsed!
As GetAGrip says, we get suckered into spending more than we should thanks to our naivete. What 20-something year old male doesn’t want to drive around in a sweet ride? After meeting a lovely woman with said sweet ride, what young man doesn’t want to shower her with gifts and experiences? After courtship, there’s the “average” $25,000 wedding, and then the honeymoon, and the bigger car, and the nicer house, and the kids, and the anniversary gifts and the retaliatory spending….. holy seafood cioppino! Life just happens. Getting our personal finances under control is a lifelong process that gets easier with more practice.
In a very popular post here entitled, “Explaining Why The Median 401(k) Balance Is So Low” I break down why there’s such a discrepancy with what is needed and what currently exists. The post also provides real case studies for able people who are behind. A study by Transamerica Center For Retirement Studies found that the average retirement balance was only around $93,000 at the end of 2012. This compares poorly to my recommended retirement savings amount for a median aged person of $215,000-$331,000. By the time the person reaches 65, the shortfall grows to $500,000 – $2.3 million!
One of two things is either going on: 1) Citizens of America will be working until death and/or 2) My assumptions are unrealistically high. There’s probably a little truth to both, but I’m telling you from 100% experience that my forecasts are realistic for those who want to live a comfortable lifestyle in an ever inflationary environment. My figures have a huge spread to allow for those with lower lifestyle demands and those who want to live it up more.
WHAT DID YOU LOOK LIKE WHEN YOU WERE YOUNG?
Accumulating debt is just like accumulating wealth, but in reverse. Little habits compound over time to the point where we suddenly realize we are in way over our heads. Conversely, we realize we’re suddenly 10 years older and have a large financial nut thanks to consistently maxing out our 401(k)s or IRAs. It’s very hard to see the results of our progress while we’re busy living. But just one look at a picture from 10 years ago will remind us all of where we used to be.
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Updated for 2019 and beyond.
Deacon @ Well Kept Wallet says
That quote about the clown is priceless! It is so true, debt does creep up on us. We racked up $52k in non-mortgage debt and it was because we used credit as a way of life. We went to school, so we got student loans. We went on a honeymoon, so we put it on the credit card. I wanted a car so I financed it. We were just raised with the understanding of that is how you make purchases. Thank God that we no longer think like that and that all $52k is now paid off!
I never ever had any consumer debt in my life. I have had plenty of credit cards but always paid them on time and in full. I was actually quite oblivious to the fact that people actually had thousands and thousands racked up by they’re mid 20s. I always figured the average person would not be dumb enough to fall into that trap. It was not until I did my own research or peers complaining about their “bills”.
I believe I did not fall into this trap because of my parents good habits. They taught me and I saw them from a young age always paying bills on time, explaining to me if they did not pay the credit card bills on time and in full they would get charged huge interest and fees. My dad was one of those guys who would get all sorts of cards to rack up on airline points and such deals. But he always paid everything on time and in full. I sort of looked at it like pay your bills in full and you get cool rewards for free, sounds like a good deal right? I would say 95% of my transactions are on a credit card, I use it like cash except I get rewards like points and cash back. Then I just pay it off in full. It also allows me to keep better track of where I spent that money whether its on gas, food, toys, bills etc.
I can see how people do fall into that trap. Most of my friends who went off to college and while I joined the Army. Ended up with tons of credit card in debt, and it was mostly because of bad choices it seemed. Usually racking up debt on partying, clothes, food and keeping up with the rest of crowd. In the end after several thousand in debt I saw that there was nothing to show for. I am glad I did not fall into that trap and just learned from other peoples mistake.
FS- I also setup a personal cap and mint account like you suggested. I am still trying to understand everything but its great to see all my accounts and seeing a overview on my finances.
I hate to say this, but you DID have debt just by having the cards. Did you ever figure out how much interest you were paying. You STILL paid interest no matter that you paid on time and in full.
That is exactly what happened to us. I can’t even remember one individual expensive thing we bought. It just crept up. Seeing some close family members lose everything was our wake up call. I was asleep for ten years with all that debt and now am finally aware of all the possibilities.
I read It in high school and had to throw the book across the room a few times because it was so scary. Now that’s a good book!
Financial Samurai says
Definitely don’t watch IT if you are already scared of regular clowns!!
I hear you on weight creep as well. I’m about 10 lbs permanently over my fighting weight freshman year in college.
Ally G says
Debt does NOT just creep up on you. We aquire debt through our own foolishness. The only debt that I’ve ever had was a mortgage for a modest house. I’ve paid cash for everything else and if I can’t save the money, then I don’t buy it. Period.
Buck Inspire says
That IT clown is terrifying! GetAGrip’s breakdown sounds very common. As life goes on, your expenses do seem to naturally grow. To not fall in that trap, you almost have to go against human nature. For some, a crisis is the catalyst for breaking the cycle. If they are lucky, the crisis is manageable enough to not send them into the poor house. It’s now easier to see why bubbles happen.
Financial Samurai says
It’s too bad a crisis has to happen for many of us to get going. But if there was no financial crisis ok 2008/09, there would be no Financial Samurai.
Financial Samurai says
3k ain’t too bad. It is under the 5k government threshold before they implant and drug chip in your neck to help you get out of debt.
Anton Ivanov says
I agree. Even those who grow up understanding that debt is bad and should be avoided often succumb to the consumerist pressure over the years. It’s especially hard to resist it these days when seemingly everybody is doing it. If my neighbor is driving a brand new car, why can’t I?
The problem is that neighbor will probably be working until he is 60, 70 or 80 and his “golden year” will be spent wishing he saved more while he could.