Overspending…Credit Cards…Lifestyle Of Failure

It goes without saying that no one sets out in life to be a failure. Think back to all those dreams you had as a child about growing up and one day becoming a prosperous adult. Sure, back in our school days, we all had thoughts like that, even those of us who grew up dirt poor. We knew that when we grew up and got out on our own we would get a good job, find our niche in life, and be successful. Then when we entered middle school, we started looking around and saw that many adults weren’t living that dream. And we also realize that even our own parents are struggling. Both of my parents worked very hard, but never become wealthy. My father worked in a tire factory and my mother washed clothes for others. I remember when I was 6–7 years old, watching them looking at the menu in a nearby restaurant and wondering if we could afford to eat there. Even that young, I remember thinking, “I never want to live like that”.

By the time I got to high school and knew it wouldn’t be long before I had to face the world, many of my friends started getting excuses like: companies were downsizing rather than hiring, jobs were scarce, prices of goods going up faster than wages, the only good jobs required a college degree, and a college degree was just too expensive.

This dose of reality brought many reactions. Some young people with bleak outlooks on the future turned to drugs and alcohol to mask their fears and cover up their inadequacies. Other quit school and got menial jobs so they could buy cars or chase their latest fads. Even those who finished high school and went on to college were bombarded with credit card offers and the lure of easy money. The sad part is that all of these things unknowingly start many young people down a road destined to lead to a Lifestyle of Failure.

No one sets out to become a failure in life, so how do they get themselves into a pattern of overspending that leads to a Lifestyle of Failure? Well, it’s easy money and credit cards are one of the major contributors. Do you realize that each time you charge more to a credit card than you can pay off at the end of the month, you lower your standard of living for the next month thereafter until it is paid? Take a look at this example.

Assume that you earn $4,000 per month and are living a lifestyle that takes it all. If one month you spend an extra $1,000 and put it on your credit card, not only do you not have the money to pay it off at the end of the month, but in order to make the minimum payment, you have to give up something you have been accustomed to having or start charging it. Let’s assume that the minimum payment is 2 percent of the outstanding balance, which would be only $20. If you are like most people, whatever you were buying with this $20, you don’t do without it, you just charge it on the credit card. No big deal, right? Well, let’s see how it goes.

At this point, you think, “No big deal, I pay off $20 and put back $20 so I’m even.” Wrong!. If the interest rate on the card is 18 percent, $15 of the payment went to the bank in the form of interest for the use of their money. This means you only paid the balance down by $5, but you charged $20. You’re not even, because now your outstanding balance has grown to $1,015.

Next month, you again pay the minimum payment and continue enjoying your same standard of living by once again charging an amount equal to the minimum payment back to the credit card. This time the payment is $20.30 with $15.22 going to the interest, and only $5.08 being applied to the outstanding debt. After making this payment, your balance has now risen to $1.030.22 and in just two months you have paid out $30.22 for which yo have received absolutely nothing.

If you continue this same scenario for just one year- making the minimum payments and charging back the same amount so you can maintain the same standard of living — you will pay payments of more than $260 and your balance will go up nearly $1,200. Do this for another year and you’ll pay out an additional $312 and end up owing $1,430. The sad part is, you will have paid out over $570 and your debt will have increased by $430, all because you overspent by $1,000 one month and weren’t willing to reduce your standard of living until you could pay it back. Not only will you have gotten nothing for the $570 you’ve paid out, but your minimum payment will also have grown from the original $20 to over $28.

The reason credit card debt lowers your standard of living is that it’s not until you decide to do without some of the things you’re accustomed to having and stop charging them back to the card that the balance begins to go down. What’s really scary is the fact that if you never add another charge after the initial $1,000 and continue to pay $20 per month, you will have to do without whatever you were buying with this $20 for nearly eight years before the debt will be paid off.

In the above example, we are only talking about $1,000 in credit card charges. There are people with $10,000, $20,000, and more outstanding on their credit cards and they still can’t understand why they are struggling to keep their heads above water. Unfortunately, these are the same people who continue to make the minimum payments each month and keep charging more. Imagine how depressing it must be to work hard all month and then have to pay $400, $500, or more on credit card payments for which you get nothing?

Many people continue to charge until they’re unable to keep making the payments and have to file for bankruptcy. And, the really sad part is, they often get right back into the same dilemma within years of filing the bankruptcy.

The problem of debt service eating into their lifestyle is not restricted to poor people. During the real estate boom, millions of people refinanced their homes to get cash. Many recalled having dinner at fancy restaurants and these restaurants were usually packed with people. The prices of food and wines were outrageous, and people were still fighting to get in. This was in 2003 at the height of a deep recession. You may be wondering where all these “rich people” came from.

In reality, they are not rich. They just “feel rich” because real estate prices are booming and they have refinanced their homes to get cash out. They feel rich but they’re actually just getting deeper into debt. Refinancing real estate to get capital to invest in additional properties is fine, just don’t do it to raise spending money. Pulling cash out of your investments to pay for consumable items would be comparable to a farmer eating his seed corn.

This credit card example illustrated the destructive effects of consumer debt. The best is to limit your credit card usage and pay them in full each month.

That’s all for now, my friends. See you all in my next article.

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