Last week, I made the case that inappropriate debt was perhaps the single greatest roadblock to financial success and financial freedom for most people. The topic was the misuse of credit cards along with solutions for dealing with credit card problems. This week I’ll continue the debt discussion with three additional common debt traps.
Debt problem #2: Keeping-Up-With-the-Jones’-Mentality
Undoubtedly, you feel pressure to keep up with your peers. When your friends buy new sports cars, you think you should have one also. If they can afford it surely you can too. However, this attitude only leads to building a debt pyramid.
Develop an “attitude of contentment” with your financial situation at this particular point in time. When you are considering a large (or small) purchase, ask yourself, “Is this something I need or something I want?” If it falls into the want category, try postponing the decision for a week or two. By giving yourself a “cooling off” period, you will often find that logic will win over your emotional desires.
Your neighbors who spend wildly likely have no long-term goals. You must focus on your long-term goals and resist excessive spending today. If you could see ‘behind the scenes’, you’d likely discover that your neighbor is living more paycheck-to-paycheck or approaching their debt consolidation services.
Debt problem #3: Monthly-Payment-Mentality
When you’re considering purchasing a car, boat, furniture or any other big ticket items, you’re concerned with your monthly payments. Salespeople know this and are trained to ask what you can afford ‘monthly’. If the car salesperson wants to sell a more expensive car, would he or she offer you one based on thirty-six months’ payments or one with sixty months’ payments? This mentality is a shortcut to financial disaster. You cannot become financially independent by frequent borrowing.
If possible, postpone purchases until you have the cash to pay for them. This is called delayed gratification. For example, you want to purchase a bedroom set that costs $6,000. The finance company offers you “no money down” with payments of $213 a month for 36 months. This brings the total cost to $7,668! It would be better if you delayed buying the set while you begin your savings plan. Then, when you have the cash, buy the set. Also, when you pay with cash, you are in a much better position to negotiate a lower price.
Tip: The payment plans that many furniture companies offer include no money down and no interest payments. This “free” interest is built into the price of the furniture. If you are prepared to pay cash, you can negotiate a much lower price (10-20%).
Debt problem #4: Failing to Plan for Major Events
Most people tend to focus only on the short term– tomorrow or next week. This inevitably leads to many financial surprises because you haven’t considered home repairs, a new car, child’s wedding, child’s education, underpayment of income taxes.
Good planning requires that you look ahead one to five years to anticipate upcoming major expenses. For example, you know your car will eventually need to be replaced. If you ignore the inevitable, your only choice will be to borrow to meet your needs.
You should establish an emergency account equal to three to six months’ salary for unexpected events such as major home repairs. You may need to set aside even more money for other expenditures like weddings and new cars. Begin by making monthly contributions to a savings or money market account of 2-5% of your take home pay. Continue until this account reaches your target amount.
Tip: A major key to financial success is to apply the self-discipline necessary to keep your financial house in order.