Where I Came From
When I was a child my parents were fiscally responsible. They paid their bills, avoided debt, and conserved wherever they could. Despite having an average income they were able to eventually pay off their mortgage and gain some financial independence.
You may think this translated into a child who also had good financial habits, but unfortunately for me, that isn’t the case. I struggled with excessive debt and poor budgeting well into my 20s.
During many of the most difficult times I found myself wondering exactly how I got into such a mess. The answer came to me many years later. I had to have a few close calls with disaster, stand on the brink of financial ruin, and talk to a lot of smart people before I became open minded enough to really look for a solution.
Twelve Dollars, Plus Tax
The solution came to me suddenly, about the same time I used my last dollar of available credit. I was a junior in college, working towards a Computer Science degree, and was working full time. I should have been way ahead of my friends financially, since most of them had low paying part time jobs. My job as a technical services rep for a financial services company paid really well for a student.
I was sitting at my little kitchen table trying to figure out how to make rent that month. A vivid memory from the previous year replayed in my head — a spontaneous road trip with friends to another campus. One morning I grabbed a box of bagels for my friends and didn’t think anything of it. Paid with credit, of course. Little did I know that this quick show of wealth would be key to me getting back on track a few years later.
Twelve dollars, plus tax. No big deal. Add interest, whatever. Probably cost me another dollar, but who cares. I wanted everyone to know I was successful, and I wanted to feel successful. Retail therapy can give you a pretty good high for a minute. Now I was at my table a year later looking at the thousands of dollars I owed on my credit cards. I was paying a pretty hefty payment every month for goods and services I had used up years before. What the hell was I thinking?
One Big Secret About Borrowing
There is one secret about borrowing that I wish I’d known. I was taught that I should save for everything, and not ever borrow, especially with credit cards. Houses and education were the only exceptions. This seems like reasonable advice on paper, except that saving for every purchase doesn’t work in real life. Car problems, medical problems, and other emergencies can completely deplete your savings in matter of seconds, especially if you are just starting to save. Worse, I was missing a key to financial success: If you are going to borrow, borrow wisely.
Don’t buy something on credit unless your purchase is more durable than the life of your debt. I had been doing it completely wrong. I only thought about what I wanted. Paying interest for two years on a latte and a bagel that you ate last spring is insane. You are basically throwing your future away. You are sacrificing your future ability to spend on something that has no current value.
I always looked at my purchasing decisions from the other side of the coin. My payment is only $120 a month, so what’s the big deal? The problem with thinking like that is you only account for the budget side of the equation, and not the value side. You may be able to make the payment, but you are wasting the money on something that gives you no benefit. Every dollar you waste now is going to prevent you from doing something valuable in the future. Now I sound like my parents.
There are three specific things that I did to get my personal finances back under control. The first is that I went to a cash only budget. I withdrew a certain amount in cash every week and only spent what I had. It worked really well for me because I would start to face the choice of whether I wanted to buy a snack or put gas in my car.
The second thing that helped me was a refusal to buy food, entertainment, and similarly non-durable items on my credit card. I would pay cash or not go. There can be a lot of peer pressure to go on trips with friends, see movies, or do other things that cost a lot of money. Just figure out how much you can afford and stick to your guns. Good friends will always be supportive.
Lastly, I asked the advice of a few key friends that were financially successful. I talked about budget, expenses, and their personal strategies. No one book or program works for everyone, but the principals are all the same. Be wise in your choices. Start where you are and work towards what you want. Have the courage to make sacrifices and you will enjoy a better future. Lastly, if you are a parent teach your children the true cost of borrowing and help them have a more realistic strategy to become successful.