The Federal Reserve stated today that U.S. consumer borrowing fell yet again in February, the 12th month of decline in 13 months. In other words, for the past year consumers have been paying off their credit cards and purchasing using cash.In the short term, it is "bad" when people pay off their credit card debt, because that money was not spent on the economy. On the practical side, citizens with low levels of debt build an economy that is more stable and with real prosperity. Nations of savers become nations of creditors, and nations of creditors rule the world. So, in a sense, it's your duty to pay off your debts and save money.
Most advice one hears about paying off debts includes things like, "pay off your highest balance cards first," or "get a second job," none of which get to the heart of the issue: psychology. Thus, the advice you will find here is not of the traditional variety, but is instead straightforward advice that you may not want to hear, with no punches pulled.
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Rule #1 - F**k Appearances
One of the most remarkable things I see as a banker is how many people are drowning in debt and worried, yet who continue to spend lavishly. In cities they host dinner parties, travel, and go on shopping sprees. In rural areas, they buy pickup trucks and motorbikes. That is, they act like they are rich, except of course that they aren't. If this describes you, read on.
Keeping up appearances is a financial killer. At the next opportunity, say to your friends, "You know, I've been spending so much money recently, I can't afford to do that." The first time you say this to your friends they may be surprised. But the fact is, everyone has a limit to how much they can spend. You may find that people encourage you and say, "We wondered where you were getting the money from!"
Are you worried that your friends will think less of you if you can't keep up your current lifestyle? If so, then they weren't really your friends in the first place.
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Rule #2 - Keep Your Housing Costs Low
You should spend no more than 32% of your household's pre-tax income toward housing (ex. mortgage and taxes, or rent). For instance, a single person who earns $5000 per month should spend no more than $1600 a month on housing. A person who spends more than this level will find it difficult - if not impossible - to save money and still have a life.
If you are currently spending more than 32% of your income on housing, you have to move. Sell your house and downsize if you have to. If you are already in the cheapest housing available and still spending more than 32%, you need to look for a new job, because yours doesn't pay enough.
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Rule #3 - Read your Statements
Many people - especially those in debt - have a habit of opening their credit card or bank statements and only reading the balance (if they open the letter at all). Ignoring your statements won't make the debt go away. Instead, check every single line on your statements. You may be surprised to find hidden charges, extra fees, or simply that your last night out cost more than you remember. Reading your statements will give you a clear and honest look at your monthly spending.
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Rule #4 - Forget about Monthly Payments
"Low monthly payments" have a way of making large purchases seem insignificant: don't fall for it. If you owe $10,000 and your monthly payment is only $50, you still owe ten thousand dollars.
As a rule, never buy anything on credit that declines in value, except for a basic automobile. That means no stereos, no sofas, no washing machines on credit. No dinners or movies, either.
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Rule #5 - Do a Walkaround
Before you make small purchases, do a store walkaround. That is, leave the item on the shelf, walk around the store, browse, chat, and if 5 minutes later you still want to buy the item, go ahead. You will find that after a few minutes of contemplation, what you thought you wanted may not be so desirable after all.
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Rule #6 - Calculate HTB
HTB stands for "Hours to Buy." Take a look at your pay stub, and see how many hours you worked and what your final pay was. Then, use the numbers to calculate your hourly income after all deductions. For example, if you get paid $1500 every two weeks (after taxes and deductions), your hourly income would be $1500/80 Hrs = $18.75, or roughly $19 an hour. When you want to buy a large item, think about how many hours you had to work to pay for it. If a $1200 television takes 63 hours of work ($1200/$19 = 63) to buy, is it worth it? If you think so, then you can buy it with your savings. If you don't think it's worth so many hours of work, don't buy it.
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Although spending money on credit is fun at first, seeing your savings grow and savoring the possibilities is even better. You owe it to yourself to enjoy life while at the same time preparing for the future, and once you start you'll find it isn't hard. In fact, it's amazing how quickly you can "get ahead" once you really try with no excuses.
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"What you don't spend, you don't have to earn." Lou Krieger, The Poker Player's Bible.
