Spending on Credit


The basic concept behind credit is amazingly useful in starting companies, financing a house, buying a car and building a strong economy.  Without credit many people could not afford a decent mode of transportation or nice shelter.  Any small business trying to expand will tell you, "leverage is good."




The problem I see emerging (and what I believe is tugging at the success of our great country) is people living lives which they cannot afford, because of credit.  A city dweller can get around almost anywhere and do almost anything without any physical monetary funding in his pocket.  A small piece of plastic introduced in the last few decades has relieved our society of the burden of metal coinage and paper currency.  With the advent of the internet even the plastic card has disappeared, so anyone with the capacity to memorize 16 digits can purchase literally anything and have it delivered to their doorstep within hours.  Amazing, right?


The problem with this system is when people start to think that purchasing an item or service is a 'swipe of the card'.  The same action used to purchase bread and milk at the grocery store is the exact same action used to buy a mink coat and matching shoes at Neiman Marcus: Swipe, Sign, IT'S MINE!


When swiping and signing, your new account balance doesn't show up on the receipt, the amount of time you spent working to make that money isn't automatically calculated, the little voice inside your head that says, "You know you shouldn't buy that right now" doesn't even have a chance to speak!  If everyone had to pay for their mink coats in cash, I strongly believe some people would reconsider their purchase.  Counting out $20 bill after $20 bill and physically laying it on the counter in front of the clerk has a much larger impact than handing them the same plastic you paid for your pack of gum with earlier. 


But what about building credit?  If I don't use my credit card, then my credit rating will go down and I will never get good financing, what do you say to THAT Neville?  Well, that is true....but first let us look at who wants you to use your credit cards so desperately in the first place: Banks.  When you use your credit card, you are RENTING money from the bank, like you would rent a car.  The longer you rent that money, and the more you rent, the more they make.  Trust me, renting out this societies most precious commodity is big money, 18% interest per year is no joke when hundreds of billions of dollars are being thrown around.


So buy your morning cup of coffee and bagel everyday, buy a car worth more than your years salary, go out to lunch everyday, buy a house which costs you 4 times what you and your spouse make in a year, live the good life and go on vacation to Hawaii while a red line is painted all the way down into the abyss you call a bank account.  It seems having never touched a credit card would have left you better off.



Of course this is NOT the average American, but it is reality for a very large population.  I am not against spending, I believe it is what drives the economy and has made our country so great, but I am a firm believer in SAVING.


When money comes in, you should put a substantial percentage away IMMEDIATELY before you can even touch it.  Banks offer automatic withdrawals to savings for free, there is no reason you shouldn't be doing it already. 


BUT NEVILLE, I HAVE LOTS OF EXPENSES, I need every cent of that money!  Unless you are literally starving, you have no excuse.  You can cut back your spending to put money in savings.  AND NOT JUST ONE ACCOUNT.  Do not make the mistake of only putting money away in your employers 401K or have one savings account, HAVE SEVERAL. 

Have a 'rainy day' account, a proper 401K or IRA, and another 'rainy day' account for life's unseen obstacles.  For EVERY amount of money you bring in, a percentage should go to each account. 


The reason so many Americans who have lost their jobs are so desperate right now is because they did not put enough money away in separate accounts when the economy was flying high.  If you loose your job now, you can fall back on your first rainy day account till you get back on your feet.  UNDER NO CIRCUMSTANCES SHOULD YOU TOUCH YOUR PERMANENT SAVINGS. 


If you pretend you don't have it, you will become desperate enough to find a way to make that money, simply saying "It's a good thing I can dip into my 401K plan" is the wrong mindset.  Your permanent savings is NOT to be touched till you are retired.


Having money to fall back on for any unseen circumstance can be very satisfying.  Going out for lunch to an expensive restaurant everyday will not help you when you loose your job, but that fat little savings account will.  Having a fallback will give you a satisfaction that can never be attained by a $20 lunch or a $4 morning coffee. 



To end my rant on excessive spending, I would like to say that unless you are buying assets which will make you money, PLEASE DO NOT over-extend yourself financially.  Having a secure financial plan and keeping your monetary worth in the green can be great for your relationships, mental health, physical condition and family.   




Happy Spending & Saving,