Do you ever wonder how much of your money is really yours? Crazy thought, right? Of course, your money is your money! But if you’re carrying debt, less of your money is yours than you might think.
Think, too, about what happened to get you into debt to begin with. For many, debt resulted from bad spending habits. Actually, if you’re not spending cash, it costs you money to spend money.
An article from How Stuff Works gives an example you can wrap your head around. It helps you understand where your money goes when you’re trying to pay off credit card debt.
It says a credit card is like someone giving you money to buy something you can’t afford now but can easily pay off in the future. In reality, you end up owing more and owning less!
If you’re never content with what you have, you’ll probably end up with huge amounts of debt.
Here’s how it happens. You make a $500 purchase on your credit card. You rationalize spending the money because you know the $15 monthly payments are completely doable. What you miss is the lender standing next to you, hand outstretched demanding those interest charges.
With today’s interest rates around 20 percent and monthly payments of $15, it will take over four years to pay off the original debt. Plus, you’ll be paying an additional $236 to the credit card company. You have to ask yourself, “Will the item be worth it when I finally own it outright?”
There are the small “wants” in your life, and then there’s the bigger “musts,” like college, weddings, medical emergencies, unemployment and relocation. All of these can add to your debt.
Spending More Than You Make
More than 40 percent of Americans spend more than they make, further adding to a debt-centered life. And many people live month-to-month, which leaves no money to fall back on if money runs out or an emergency comes up.
Spending more than what you make sells your income to the future. There’s a myth that makes you think you can catch up on debt in the future, but when the future comes, you’re in the same situation year after year.
Spend Less Than You Make
Spending less than your salary has probably not been the model you’ve grown up in the modern world. However, saving and paying cash helps you be prepared for the future.
The article says it best, “Your monthly income should be dedicated to future planning and present comforts, and you should pay money into your savings to reach goals and achieve whatever amount of financial security you desire.”
How Much Should I Save?
Most financial advisors recommend having at least six months’ worth of expenses saved to cover the cost of emergencies. Most emergencies in the US have to be financed since less than six percent of U.S. incomes are being saved.
Banks and Creditors are For-Profit Businesses
Being careful of what you decide to go into debt for can make a big difference on how much money you are able to save. If you’re living paycheck-to-paycheck and come up short, a payday loan may seem like an answer from Heaven. Beware of finance fees and interest that can be as high as 500 percent! (And that’s not a typo!)
They want to give you a short-term loan and cash in on the huge interest they will receive when you pay it back. And in many states, if you default, you’ll face collections, court, and possible arrest warrants.
A Better Way
Instead of living month-to-month, or going into debt for those little “wants,” take some time and look at your finances. Knowing how much is coming in, and where it’s being spent, makes it easy to see where changes can be made. See related article here.
Just a small change at first can allow you to start saving. Did you know at iFlip, there are no minimums to open your account and start investing? And you don’t even have to know how to invest.
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