Donell Edwards, Blogger
About Donell Edwards: Donell Edwards is President of CWR Media and is also founder and publisher of The College World Reporter (CWR) magazine and CWR World News & Information Service. He is also a professional speaker, freelance writer, and entrepreneur.
Know Your Money
Tuesday – May 6, 2014
Knowing Your Personal Finances
KYM Special Series: The Debt Factor
How Did I Get All This Debt?
By Donell Edwards
The rest of this week Know Your Money will focus our attention and yours on the role debt plays in personal money management. Most of us have, or have at one time had debt. Many have been and may still be overwhelmed with the amount of debt they have accumulated. They may ask in astonishment, “How did I get all this debt?”
For this blog I will use points from today’s Must Read, 10 Reasons Why You’re Still Living Paycheck to Paycheck, written by Christina Lavingia from the GoBankingRates.com website. Here are Ms. Lavingia’s 10 reasons people live paycheck to paycheck:
- Paying the minimum on debts
- Trying to keep up with others (the proverbial Joneses)
- Failure to plan for irregular expenses
- Failure to plan. Period.
- Not realizing how handy you are or can be
- Spending impulsively
- Paying for unused memberships
- Avoiding bank account and credit card statements
- Viewing your credit limit as an asset rather than a liability
- Failure to think like an investor
I strongly suggest that you read Ms. Lavingia’s entire post as well as our other Must Read for today, The Debt Tax: What Owing Money Costs You, both are in our Must Read section at the end of this post.
I would like to focus on several of the points Ms. Lavingia mentions in regard to how we get deeply in debt.
First of all, one of my pet peeves is spending impulsively. Usually at the root of most problems regarding acquiring too much debt is a lack of control over spending urges. Obviously, in order to acquire debt we must first create debt. When we do not have the willpower to resist temptations to spend, and especially if we are one of those people who has spendaholic tendencies and spends just because we have money or available credit on credit cards, it is easy to quickly get deeply in debt.
Stop! Take a few minutes and ask yourself if you are an impulsive spender. Do you go into stores with no intention of purchasing anything, just to see what is new or interesting, and leave with a shopping cart full of things, or a bag full of stuff that you don’t need? Be honest with yourself. Are you the first person in line whenever and wherever there is a sale? Does the word “sale” arouse your emotions and make you feel like doing cartwheels? Do you purchase things that you don’t need merely because they are on sale?
Another very serious problem that contributes greatly to accumulating debt is viewing one’s credit limit as an asset. Some of us view our available credit limit on our credit cards or retail store accounts as an asset. Those people make the mistake of forgetting what credit really is. Credit is defined as the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. Credit, is a loan that allows the consumer to enjoy what is purchased now, but with the requirement that the loan will be paid back in monthly payments. Credit is a liability, it is not an asset, and should be viewed that way.
Most people don’t come to this realization until they have maxed out all of their credit cards, and the credit cards are then virtually of no use to them because now instead of being able to use them for purchases, they are faced with making monthly payments without being able to use the credit cards, except for whatever amount of credit becomes available after each monthly payment is made. Usually, because of high interest rates, there is not much left to spend.
This results in a vicious cycle where consumers will make a payment and then because of being so deeply in debt they are desperate for any available money or credit they can get, so instead of paying down their debt, they make a payment and then almost immediately charge whatever amount becomes available and continue this process month after month instead of paying down their debt. The credit card companies love this because they are making money as long as the consumer pays.
The other negative from getting in this situation is the affect it has on a person’s credit score. Although it is very important to make payments on time, to avoid going over the limit, and to make more than the minimum payments as often as possible, another very important factor that affects the FICO Score is what percentage of the consumer’s credit line has been reached. If the credit usage is beyond the limits established it lowers the consumer’s credit score.
So, just these two factors, impulsive spending and viewing a credit limit as an asset rather than a liability contributes to most of the other things Ms. Lavingia mentions in her post, such as paying the minimum on debts, avoiding bank account and credit card statements, and failing to plan.
Debt is a monster and must be slayed if personal finances are to be effectively managed and controlled. That is why we recommend making whatever sacrifices are necessary in order to totally eliminate debt. Tomorrow we discuss how having a cash budget and using other spending controls can help avoid getting deeply in debt, and can help eliminate debt.
The Debt Tax: What Owing Money Costs You
10 Reasons Why You’re Still Living Paycheck to Paycheck
If you have questions or need help we are just an email away. Send your questions to Info@KnowYourMoneyGlobal.com
We Would Like To Hear From You. Are There Any Brave Souls Out There Willing To Share?
If you would like to share with our readers how “bad” spending habits have affected you, anonymously or otherwise, for our upcoming special, “Confessions Of Spendaholics,” please send your experience to firstname.lastname@example.org.
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Disclaimer: I have a Bachelor of Business Administration degree but I am not a financial adviser. However, I have acquired years of knowledge about personal money management through my life experience working through my own personal finances that allows me to share that knowledge with readers of Know Your Money. The Know Your Money Blog posts written by me are my own common sense observations and opinions and are for informational use only. Although my blog includes contributions from experienced financial professionals, please make your own financial decisions based on personal research or contact a financial adviser.
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