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Why it’s so easy to get into debt trouble?Americans owe more than $1.6 trillion in consumer debt—more than 10 times what they owed in 1970.
The benefits of debt and credit
The emotional side of spending and saving We all know, at least at some level, that we should have enough savings to weather a financial setback—the loss of a job, an injury or illness that interrupts or reduces income, or a costly expense. We know that we should be steadily building up our savings—for retirement, our children’s education, or for the down payment on a home. We know that increasing our savings and reducing our debt over time is good for us. Yet the great majority of us don’t behave as though we understand this at all. For the population as a whole, the rate of savings is shrinking, and the level of personal debt is rising. Why do we often act in irrational and self-destructive ways with our money? A big part of the answer is that we aren’t calculating machines. We aren’t very rational. We’re human beings with complex emotional needs. And access to money and credit plays to our emotions in ways that are hard to control. At a primary level, there’s the tension between “now” and “later.” Spending brings immediate pleasure. We don’t enjoy the benefits of saving—or the pain of debt payments—until later. We may think of ourselves as mature adults, but there’s still a lot of the two-year-old in each of us. “I want it now” can easily overpower “But think about later.” The way we behave with our money is also deeply rooted in our experiences, especially in childhood. For example, if you grew up with a parent who was a disciplined saver and never spent money on fun extras, you may find it easy to follow that model yourself. Or you may find yourself behaving in ways that are a reaction against that early experience. At a level you may not even be aware of, you may view savings as an unhealthy form of self-denial and spending as a way to achieve a more balanced and happy life. If you grew up in a household where there was never enough money, you may find yourself driven to make money, even at the expense of your own or your family’s happiness, or to spend beyond your means in very visible ways. Early experience with money might be driving you to be overly cautious with your money, or to take unreasonable risks. Behavior patterns with money are also set early in life and can be hard to change. Older people, who established their spending and savings habits before the introduction of credit cards, tend to use credit cards as a convenience and not as a way to borrow. People who started their careers before 1970 are far more likely to pay off their credit card balances each month than are people who entered the work world after 1975. People old enough to have experienced the financial trauma of the Depression tend to be very cautious when it comes to debt and savings and very aware of maintaining a cushion against a possible money setback. And people who entered the work world during the boom of the mid- to late 1990s are more likely to have a freer and more optimistic outlook on their finances than people who have had trouble finding a job during an economic recession. A good way to get a better understanding of your relationship with money is to talk about it with a trusted friend. Share stories of ways you’ve acted with money and talk about experiences you had with money growing up. If you’re like most people, you’ll find a connection between the two. The more you understand about why you act the way you do with your money, the better you’ll do at noticing and dealing with things you do that may hurt your financial health. The down side of debt If debt is part of the engine that drives our economy and if it’s such a wonderful convenience, what’s the matter with being in debt? What’s the down side? The “snowball effect” of debt Part of the problem is obvious. You build debt because you don’t have the money to pay your expenses, and the debt then adds to your expenses for months and years to come. That makes it more likely that you’ll need to borrow even more to pay your expenses in the future. Paying with debt solves the immediate problem, but it creates a bigger problem down the road. Once the debt cycle gets rolling, it takes real effort to turn it around. The cost of interest The second problem with debt is that it’s expensive. It would be hard enough to pay back growing debts if you just had to pay the amount you borrowed. But you actually pay much more than that when you add in interest and latepayment fees. Let’s look at a typical credit card that charges 18 percent interest and imagine that you have an unpaid balance of $1,000. If you make the minimum required payment of 2 percent each month, that comes to $20. That seems reasonable and manageable. If you pay $20 the first month, you might expect your balance to go down to $980. Then to $960 the second month. At that rate, you’d pay the balance off in just over four years. But it doesn’t work that way. This kind of calculation ignores the effect of interest. Actually, your account is charged 1-1/2 percent interest each month (18 percent divided by 12). That comes to $15 the first month. So you pay $20, the bank adds $15 in interest, and the balance drops by just $5—to $995. Instead of taking four years to pay off the balance, it will actually take eight years. And instead of paying back $1,000, you’ll actually pay back $2,000. That’s if you’re on time with every payment and aren’t charged any late fees. If you’re making just the minimum payment on a credit card that charges 18 percent interest, you’re actually paying twice the price on the label or the receipt every time you buy with that card. So a $60 pair of shoes will actually cost you $120. A $50 meal will actually cost you $100. Try doubling the total next time you pay for something with a credit card and see if it seems like a good value. The emotional cost of debt The third cost of debt has to do with your emotional well-being. When your debt total is going up instead of down it can leave you feeling trapped, desperate, and not in control of your life. You can feel that someone else “owns” you, to the point that you deny yourself the breaks and pleasures you need to stay healthy and happy. A debt problem can drain your sense of confidence and self-worth. It can lead to depression, unhealthy anxiety, and health problems. The emotional effects can damage your marriage and your relationship with your children, friends, and extended family. Money problems are the single biggest factor in relationship problems that end in divorce. Debt problems can affect your performance at work, pushing you to overwork in a “nose-to-the-grindstone” way, and keeping you from contributing with energy and creativity in ways that add value to your employer and lead to bonuses, raises, and promotions. Debt is clearly a two-edged sword. Used wisely and carefully, it can help bring you greater happiness and prosperity. Used casually and without careful planning, it can lead to economic crisis and intense emotional stress. Getting Out of Debts (Step by Step Instructions)
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