Our parents and grandparents were brought up to believe that before buying large items, they would need to save to have the money. Newly-weds often started with little and built up gradually as they had saved money for what they wanted. General purpose credit cards were unknown till the second half of the 1900s.
By contrast, today one can live in luxury, but, on the flip-side, be head over heels in debt. The plastic card – issued not only by banks, but also individual stores – allows us to buy now and pay later, sometimes months, or even years later. By that time, however, the original cost has no small interest added to it. Paying off the original items – now possibly with considerable wear and tear – may become seemingly endless – and the mounting debt with high interest added can become a vicious circle.
So, one of the key principles to make your money stretch is to, if at all possible, stay out of debt. This may be regarded as an old-fashioned, even obsolete, idea in a world where young people are not encouraged to wait and save for what they desire.
Neither is it fashionable to start small and upgrade when the money is there.
Western culture has acquired an insatiable hunger, almost greed, for material things in the hope that possessions will bring happiness. Ads lure us at every step of the way to buy now and pay later, or buy whether or not you need it and irrespective of if you can afford it. And the economy is structured so that it prospers when people spend – the more the better.
We are indeed powerfully and methodically influenced by “Hidden Persuaders” to borrow the title of a bestseller by Vance Packard, written over half-a-century ago, but still extremely relevant. Yet, to remain debt-free may still be the best way in the long run.
What can we do? Here are tips to consider in order to avoid being negatively influenced by the prevalent culture, to think for oneself, and to make wise decisions.
1. Stop and ask the following questions for every contemplated purchase, large or small:
2. Realize that credit cards are good servants, but cruel masters – and so, use with caution.
I have found that one, or at the most two, credit card accounts is all that’s needed. Having a credit card from every department store we visit unnecessarily complicates life. It also provides a temptation to overspend and lose track of where the money is going. Just ignore, or say no to, all the offers of credit cards that you may receive – even if they offer an incentive. In the long run, it is not worth it.
Pay off the total credit card balance every month by the due date. This will help you keep track of how much you have spent and most importantly, there will be no extra cost for interest. Remember that the annual interest on credit cards is often around or close to 20% and is compounded on any unpaid balance, and therefore, the charges add up very quickly.
3. Don’t allow yourself to be pressured into buying.
As a principle, we almost never buy from door-to-door salespersons, no matter how good the deal sounds, or how persuasive the doorknocker is. I recommend you give yourself time to think about the facts presented – to sleep on it. If the salesperson says they can’t be contacted later, or the deal is only available through them, I like to just politely thank them for coming, and then I forget about it. After all, I didn’t ask for whatever they are offering, haven’t missed it, and most likely can live without it. If I start seeing a need, I’ll visit a store or search the Internet to make the best purchase then.
4. Make a shopping list and stick to it in most cases.
Before doing your shopping, write down what you need. Resist the temptation to add to the cart items that are on sale, but that you don’t really need. Ask the questions listed in point 1 above before making an exception to the shopping list rule.
Obviously, there are certain things one cannot buy without borrowing money. One of these is a home. If possible, home ownership with a bank loan may be more advantageous in the long run than renting. While paying off your home loan month after month for twenty, or even thirty, years, in the end you’ll own the property, which will also most likely have risen in value. You will be better off than having paid rent for the same number of years and have nothing.
So a home loan is wise, but only under certain conditions. You need to have an initial deposit and be able to afford the repayments over the duration of the loan. Stretching yourself initially may be worth it. However, carefully consider the potential danger of not being able to make your payments if one of a couple loses their job, another baby arrives, or something unforeseen happens. If you default on mortgage payments, you could lose the property, as well as what you had already invested in it. Wisdom and prudence are called for in this type of long-term investment decision.
Here are other tips for getting out of debt:
1. If you are in debt, other than paying off your mortgage, plan to minimize the debt as quickly as possible.
Small loans and credit card debt carry higher interest than home loans. Therefore check to see if you can consolidate your debts, such as house, car, furniture, etc. Ask about adding a little to your mortgage loan to pay off the smaller items. Then make slightly bigger monthly payments. This way you’ll have just one loan to worry about and pay the lowest possible interest.
2. Resolve to pay your credit card debt off as soon as possible.
At close to 20% interest per year, it is just costing you too much and you are gaining no benefit. Think of the money you could save if you had no interest to pay and what you could buy instead! Resolve to put aside each month a certain sum, the bigger the better, towards paying off the debt. Over a period of time, it will be encouraging to see the debt (and the interest paid on it) diminish. Plan to celebrate or reward yourself in some way when you achieve the goal of paying off your credit card debt. Then resolve to always pay the full balance by the due date so as not to accrue any further interest.
3. Have the discipline not to add to your debt, unless it is totally unavoidable.
See if you can cut other expenses as much as possible to live within your means. Downsize if necessary – be it selling a second car or exchanging the present family car for a smaller, more economical one. Could you manage without a car – even temporarily? It is worth considering – there can be some advantages other than cost saving. Could you make do with a smaller home in an area better connected by public transport? Look at your life style and your expenses and see if there is anything that can be cut.
4. Increase your monthly loan repayment, or make payments every two weeks instead of once a month.
This is another way to save on interest from your loan. It will not make much difference to your monthly budget, but will considerably shorten the life of your loan and the total interest paid. When taking out a loan, ensure that there is no pre-payment penalty – being charged for repaying the loan faster or in a shorter time than originally agreed. If there is such a stipulation, consider a different loan or another lending institution.
To sum up, never forget that credit is a good servant, but a cruel master. To keep it under control, evaluate each contemplated purchase, use credit cards cautiously, don’t be pressured into buying anything, and plan your shopping with the help of a shopping list. If you are in a runaway debt situation, make a concerted effort to pay off your debts little by little through debt consolidation and paying your credit card monthly balance in full when it is due. Then determine to keep your debts under control, so that credit can serve you rather than oppress you.