Simple Money Living is a ten article series about living, simple, with money and without debt. We are on a journey of change; changing our financial lives for the better. Ridding ourselves of debt and building a strong base to build our lives upon.
My name is Jayson Bastien, an advocate for improving personal finance in our everyday lives. I strive for change by way of daily improvement in my life and I want to enable you to do the same. Sharing knowledge of how to navigate through our financial world is where I can be a positive change. I am a Canadian designated Chartered Professional Accountant, Chartered Accountant and have been studying personal finance since my early teenage years. I’d like to thank you for starting your journey of change with me.
In our first week we discussed the importance of setting up a basic emergency fund. It’s priority one in setting yourself up financially, all you need to start is $1,000. With an emergency fund you will know you and your loved ones have a safety net and you will be able to sleep at night.
Harm by debt
When you were kid you may have touched the stove, stuck a fork into an electrical socket, fallen down and bashed your head and it hurt a lot. You probably never did it again because you were physically hurt and may have a scar as a visual reminder of the pain. Physical injury is painful and many times clearly visible.
Harm by debt does not leave a bruise or scar. The pain you feel with debt fades quickly. If we are to judge from the world’s current debt, the world economic crash of 2008 has been forgotten. The world carries more debt than ever before and, like mentioned earlier, there is not enough money to repay it. We’re repeating the same mistake; people are going to get hurt and get hurt badly again. The more time moves on, the more people forget – regulations are not put into place and the party continues. Everyone continues to try to “keep up with the Joneses”.
The true financial cost of credit card debt
Items purchased with credit cards can carry upwards of 20% interest obligations. That’s why a $3,300 Visa bill will cost over $32,000 if only the minimum payments were made and it will take approximately 37 years and 7 months to pay off! Interest is compounded daily on credit cards which is a large reason why it can take decades to pay this type of debt off. Living in debt can be very expensive, and that’s why living debt free, as much as long as possible, is key!
How to limit credit card debt exposure
- If you can, do not use a credit card: Not having a credit card is the single best way to eliminate your credit card debt exposure. No temptation will arise because you don’t have a credit card. You can say goodbye to paying 20% interest and to keeping your money in your pocket.
- Pay off the credit card bill in full each month: Paying off your credit card bill in full each month is a great way to not carrying credit card debt and earning points for groceries or cash back is great, depending on which type of credit card being used.
- Follow your budget (we’ll be addressing budgeting in a later article): Following your budget keeps you on track of staying out debt by making sure you do not overspend. It’s tempting to make a spontaneous purchase and not have to deal with paying for it until your credit card statement arrives. This can be the beginning of a slippery slope that the budget is designed to avoid. Budgets, which will be discuss in greater detail in a few weeks, have built in “cushions” in case of some overspending. The key is to work within these boundaries, rather than making purchases spontaneously.
- Do not accept credit limit increases: The credit card company is in business to make money. The credit limit they are offering is not what they have decided you should spend each month. Just because they offer a credit limit increase does not mean you should accept it. The great feeling when you’re offered a credit limit increase is fake; you are not being offered more money, you are being offered a larger hole to fall into. The higher the credit limit the greater chance of having to pay the minimum balance which means more interest to credit card companies.
Higher cost and lower value: auto loans
When it comes to auto loans, stay away when you can, try to find 0% interest deals or buy a used vehicle and pay in cash. Vehicles decline in value more quickly than many other large purchases do. Paying more for these items in the form of interest expenses will further harm your finances; vehicles are financial liabilities not assets. Vehicles are a means of getting to and from work, so is public transit and at a fraction of the cost! Auto loans can carry interest rates at 3% to 5% or more. Financing a car means paying more money and having a lot less value which means you lose twice!
How to avoid auto loans
- Utilize 0% interest deals: If you are buying new many dealers offer a 0% financing option which is great because there’s no interest to pay. Beware of artificially low rates (it may prove more financially sound to take a large cash discount instead of financing at 0%). Watch out for extensive financing periods, financing for four years or less is ideal.
- Purchase a used car: Purchasing a used car can save a lot of money, providing the car is in good condition and has been maintained. You may have to pay cash for the used car however it requires discipline to save up for this.
Buying vehicles every few years is expensive. Cars that are of good condition and are maintained well should last 8 to 10 years or more. Shopping around and negotiating goes a very long well to finding a great car that doesn’t break the bank and will last for years! Well spent money is money spent on vehicle maintenance; routine oil changes, tire rotation, new tires when needed, etc.
The emotional cost of debt
The emotional cost of debt is far worse than the financial cost. This cost is not discussed because debt isolates people. According to Debt.org people suffer denial, stress, fear and panic, anger, and depression. All these negative emotional aspects of debt affect far more than the debtor. Debt affects families, friends, work, and health. Families divorce, friendships break, poor performance occurs at work and people develop chronic illness.
People feel isolated and ashamed of their negative financial situation because it is seen in society as being weak. We once again fall into the keeping up with the Joneses standard of living. It’s nearly impossible to see whether others are swimming in debt because the last thing they’ll do is speak up. It’s sad and scary to know this goes on.
Do not feel ashamed about debt. Money and debt are not being taught to the full depths that it should. According to an article released by Forbes.com only 57% of Americans are financially literate. Canadians are at 67% with Australians at 64%. The highest ranking country, Norway, has 71% financial literacy score. Combined with the rest of world only one of every three adults is financially literate. You are not alone in not having the education in how to behave with money and debt. We will learn in a few weeks that it’s 10% knowledge and 90% behaviour when it comes to living with money and debt.
The key to reducing and eliminating the negative emotional cost of debt is to change your behaviour!
Paying down debt vs investing: why they’re wrong
Banks and some investment advisors will recommend you start investing as early as possible despite having debt because rates of return are superior to that of interest rates. If this was the case then how are everyday folks still in debt? They’re wrong; focus on paying down your debt first and here’s why:
- Paying down debt saves you that interest between 3% to 5% on auto loans to 20% on credit card debts. Those rates of savings are guaranteed! GUARANTEED!
- It is difficult to achieve consistent rates of return above the rates of interest you will pay mentioned in point 1. You may at best be only making a percent or two above the interest you are paying; would you invest your money to get 1%? Most people do not even contemplate a GIC earning 2% in our current market.
- Investment prices fluctuate and timing the market is difficult at best. When you need your money to pay down the debt, it may not be there.
Once you have no debt, the money you save and invest will grow significantly even at lower investment returns. Debt erodes your financial base so avoid it where you can.
Not all debt is bad, there’s smart debt however smart debt these days isn’t so smart. Find out how to Determine YOUR Smart Debt in next week’s article.