This article is part of a series. Check here to see all the posts!
In the first post of this series we will be looking at some of the psychology behind how we make financial decisions. It is quite easy to say that we are all rational, intelligent human beings that are perfectly capable of making good decisions about how to handle our money. Of course we know that we should spend less than we make! Of course! But, do we actually do that? No. The reason is that we don’t make decisions in a vacuum. There is a constant barrage of influence bombarding us throughout our daily lives and the vast majority of this influence is there to tempt you towards consumption.
The Attitude Towards Spending in America
You see, we live in a capitalist society and the vast majority of our culture and society is based around business, success, and money. These are the facts, sorry. What this means for the average person in America is that we have advertisements thrown at us at every available opportunity because the everyone wants to sell more products and make more money.
- Lose weight now!
- Get more action from the ladies!
- One neat trick for overnight millions!
- ACT FAST! Time is running out!
Do these things look familiar? Notice how the sense of urgency is huge in all of these lines?
There is a “now” mentality that millions of people suffer from. Instant gratification.
Unless you’re living under a rock you will see and hear these types of messages every day of your life. You may be thinking that you are much too smart to fall for those types of advertisements. Those only appeal to naive and hopeless people. Well, the fact of the matter is that Americans have over $850 BILLION dollars in credit card debt at the time I’m writing this post with over 46% of everyone in America holding on to a credit card balance. There is a problem here. The issue is that credit cards and debt are so commonplace that many people see it as an accepted part of life!
So why do people constantly make these types of decisions? I have a little story that may seem all to familiar to some of you reading this post:
Keeping Up With the Jones’s
Imagine for a moment that you are doing okay financially. Maybe your young family of 3 has a mortgage and a small car payment. Maybe a dance lesson or two each month. No sweat, right? Well suddenly your wife’s friend at work just got a brand new car and she’s suddenly asking you why you’ve been sharing one car for the last three years. You know it’s because you can’t really afford to take another payment on. You know it’s because you’re working on clearing away some old debt from your college days. You know it’s because you’ve been working on bringing the savings account up to reasonable levels. It’s not really a huge bother to share anyway! But, the more you start to think about it you are beginning to question why you can’t have the same things as the next guy. Things are going pretty good so why wait around? The car payment won’t hurt THAT much. It will slow the savings down a little, but your bonus is coming up in a few months and you will be able to throw that into savings after all, right?
But, the more you start to think about it you are beginning to question why you can’t have the same things as the next guy.
So, you decide to surprise your wife and take her to the dealership. You set out a reasonable budget and go to town. She gets the car she wants and everything is great! A few months down the road and you’re used to the extra car payment now and it’s not so bad skipping a couple of date nights a month to keep it. Sounds like everyone is happy! Plus, that bonus is rolling around the corner.
Once the bonus comes you quickly deposit it and just as you’re about to transfer it to savings you realize that you have to pay some title and licensing fees for the new car, as well as put a new set of tires on it. You also remember that your insurance bill has gone up quite a bit since that financed car requires full coverage. Before you know it, that bonus is all used up and your savings actually took a minor hit as well!
As time passes, things will pop up. They always do. The point of this story is that lots of decisions that create debt start off well-meaning enough and sometimes it’s hard to really consider all the different ways that we will encounter expenses in the future. It’s not that one car payment will ruin your finances. It’s more about the creeping effect of temptation and desire for new things. Over time one thing leads to another and you find yourself with credit card debt, store cards, and more.
Credit Is Literally Thrown at Us Every Day
I got my first credit card in college just walking around downtown one day. Citibank was promoting something or another and they had a booth set up with a promotional offer for college students. It was a card for college students just like me, I thought. Well, despite being a bright college kid I was pretty dumb and didn’t see past the introductory terms and bonuses. As someone that pretty well paid for his own way through college, access to spending money for things that I had been forced to do without for a long time was a recipe for disaster. By the time I graduated college I had several thousand dollars in debt on that card and it took me years to finally settle it.
But, that’s just ONE example. How many of you get a credit card offer in the mail like once a week? I mean seriously, if you have a social security number and a pulse you will have multiple card companies sending you letters constantly about how to set up a new account with “a fantastic offer, just for you!” Just look at all the places you are likely to encounter a credit offer:
- ANY department store (especially clothing)
- Most major chain stores (Best Buy, Walmart, Target)
- Every bank (local and national chains)
- Gas stations
- Destination cards (Disney, etc)
- Car companies (Chevrolet, Ford, etc)
Pretty much anywhere you can buy something, they give you an option to finance it.
Why do they do this?
Because they KNOW YOU CAN’T AFFORD TO BUY THOSE THINGS!!
They want you to finance your purchase just so you will take some merchandise home with you that day. They don’t want you to be “just looking around” . They want you to buy! There’s nothing wrong with them doing this of course; they are a business, after all. Just because it’s completely legal and business-like to bombard you with these types of offers doesn’t mean that it’s not a little excessive. All of these things take a toll on us after a while you know. I told myself for years and years after my mother filed for bankruptcy that I wouldn’t fall down the same path. Where am I now? I have a credit card and two store cards currently carrying debt on them. Three cards!!
My point to all of this is that we shouldn’t be too hard on ourselves when it comes to this type of thing. It’s so common because you’re wading through a sea of credit offers
But, I’m here to tell you that it’s okay and admittance is the first step towards recovery.
Lots of Stuff Makes Us Happy…For Now
All of these things that we can buy to keep up with our neighbors and people on TV might make us happy for a little while, but at the end of the day it’s just stuff. I honestly spend more time cursing the amount of extra “stuff” around the house that I could just get rid of and be done with it. Material things alone will not ever truly make us happy, not on their own. There’s nothing wrong with being passionate about an expensive hobby or collecting rare or interesting things, but there is an emotional connection there besides just ownership. I am here to say that the feeling of security and peace that comes with a debt free and increasing free financial life has got to be better than than any short-term pleasure derived from spending outside of our means.
It will never be worth the regret.
Tune in for the next installment where we discuss what happens when you finance those fancy things you so desperately need!
If you have a story to share about how you got duped or otherwise fell victim to the credit trap, sound off in the comments below!
For the next article in the series: The Harmful Effects of Financing Your Spending