Spending Your Way To A Clear Disadvantage
As middle-class adults, we have gone to great lengths to give ourselves an advantage. We spend years in school/college to be smarter than others, we buy nice clothes to be prettier than others. We even strive to give our kids an advantage through private school or tutoring. The examples of the advantages we seek in life are nearly endless.
It comes as a mild surprise to see people who have harnessed the advantage of a good career and middle-class income to then joyfully spend their way to a clear disadvantage. Let me explain.
Debt is a disadvantage
Debt and the ensuing interest expense are like a festering wounds that never go away until you take healing steps. When you take on consumer debt you weaken your financial position. You enslave yourself to your employment. You are reliant upon that job to meet your obligation to repay your creditors.
Debt can postpone the ability to build wealth.
Look at the current student loan crisis in America. Students are graduating from college with a mountain of debt. News outlets discuss at length the effect that this will have, not only on the student but also to society. Debt-burdened graduates are unable to start families or purchases houses.
Although I was fortunate to not have student loan debt, I manufactured my own disadvantage.
I Have My Own Tale to Share
My wife and I are still trying to work our way out of a disadvantage we created over ten years ago.
The year was 2007 and the housing market, was hot. What we didn’t know was the housing market was about to undergo drastic changes. We needed a place to live and we bought a home.
My wife and I, with our growing family, decided we needed a larger home. Imagine a scene from an episode of House Hunters. We wanted granite counter tops, a bonus room, a full master bath, and a 3 car garage. Incredibly we were preapproved for $500,000 from the bank.
With $500,000 being our new budget, we found our dream home and within a matter of a month, we owned a slice of the American dream. Or so we thought.
What we had really purchased was one GIANT disadvantage. We were young and naive. We didn’t take into account the unknowns, like yearly increases in property taxes. Our new house came with increased utility expenses, increased home insurance and increased taxes. In addition, every July, our bank recalculates a new mortgage payment for the next 12 twelve months based on escrow requirements. Never once has our mortgage decreased.
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At the time of our home purchase, my wife was a stay at home mom, raising our two young children. Our monthly take-home pay was $4600 and our newly minted mortgage payment was $2400. We were spending 52% percent of our take-home pay on our new home. As A point of reference, Dave Ramsey recommends no more than 25% of take-home be spent on a mortgage payment. We had drastically overspent on our dream.
The funny thing was, prior to buying our dream home, we looked at a more modest home that was 30% less expensive. But we were lured by the shiny brand new home. I kick myself now because had we bought the modest home, it would almost be paid off at this point.
11 years later, I am here to tell you, we survived that mistake of stretching our finances too thin. The true expense of the overzealous home purchase was not being able to contribute to our IRA’s and 401(k)’s in our late twenties. A crucial time to start building wealth.
From Disadvantage to Power
Our example of spending our way to a disadvantage is repeated thousands of times over by other families in America. Consumer debt of any kind backs you into a corner and robs you of a powerful position.
Moreover, whether you know it or not, it robs you of your freedom and happiness. Debt is enslaving. Once you spend the credit, trading your time for money is the most common way to repay your loan.
In other words, you are going to have to work to pay off your debt.
When am about to buy something for myself I like to turn that purchase into hours worked (including taxes). If I have my eyes on a new pair of running shoes I will try to figure whether working 4 hours to pay for the shoes is worth it to me.
Here is a picture of the current US debt load *
Total US household debt = $13.51 trillion
Below is a graph of the average household debt by category.
- Average revolving credit card balance = $6,929
- Average mortgage balance = $184,417
- Average auto loans = $28,033
- Average student loans = $47,671
*All figures from Nerd Wallet
If you are anywhere near these averages you need to perform this mental exercise.
- Add up all the interest charged for home, auto loan, student loan, and credit cards statements last month.
- Now, look at that total amount of interest you are paying each month.
- Now ask yourself, does that amount of interest you are paying bring you happiness?
It’s time to build yourself an advantage.
Dave Ramey’s Baby Steps are all about creating power where there was once a disadvantage. What Dave is really doing is walking you step by step through the process of building a powerful financial position.
Here have a look at his often referenced 7 Baby Steps
- Baby Step 1 – $1,000 to start an Emergency Fund
- Baby Step 2 – Pay off all debt using the Debt Snowball
- Baby Step 3 – 3 to 6 months of expenses in savings
- Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
- Baby Step 5 – College funding for children
- Baby Step 6 – Pay off home early
- Baby Step 7 – Build wealth and give!
By the time you reach Baby Step 7, you have built a giant financial advantage. You have no debt, not even a mortgage. You have now saved your way to financial freedom.
Freedom from money insecurity, freedom from worrying about being able to pay your monthly bills. The joy you will get from being financially free far exceeds the immediate gratification of a luxury car of designer clothes.
In America, easy access to credit is ubiquitous. Cars, boats, jewelry, it can all be purchased on credit. My first credit card was not a privilege I earned. I didn’t even have a job!
I was a Freshman at college when one day, in the college commons area, tables were set up from the big bank credit card companies.
To entice you to sign up, the banks were giving away free oversized t-shirts and frisbees. Yup, a free frisbee. OMG!
I was sold. After successfully negotiating my way to both the frisbee and a t-shirt, I was baptized into the world of credit. Within a week, I had my first credit card, but no job. A dangerous combination to be sure, like matches and gasoline.
You may assume there is a horror story here but there isn’t. Unlike many of my friends, I never ran a balance on that credit card.
The real story is how easy it was for me to get a credit card with no job. To this day I have never paid an interest charge on any credit card I have owned. A badge of honor I wear proudly.
The advantage of a Debt free lifestyle
If a debt is a disadvantage, then debt freedom is the advantage. Cutting debt from your life immediately lowers your monthly expenses and builds cash into your monthly budget.
The $200 per month you were spending on your car loan can now be repurposed for something more deliberate like travel or an emergency fund.
Do you hate your job? Some days I do too. Think of a day where you could change jobs or start your own business without fear of not having that paycheck. When you are not a slave to your paycheck you could even take a more desirable lower paying job to decrease stress and increase life happiness.
Every time you are tempted to take on debt, realize the only one winning is the bank. The way to beat the bank is to live a debt free life.
So the next time you feel like pulling out the credit card to pay, ask yourself, you are spending your way to a clear disadvantage.
Are you in the process of cutting debt from your life? Drop me a message in the comments and let me know how.
Thank you for reading.