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Budgeting and saving money are no longer necessary steps for making a big purchase. The ready availability of credit means most anything can now be financed – be it through a loan or using credit cards or lines of credit. While this is undoubtedly convenient and a seemingly fulfilling way to achieve short term wants and needs, it is not without consequences. The frequent and lackadaisical use of credit can come at a hefty price; none the least of which include steep interest costs, deferred savings and investment opportunities and the potential for becoming so deeply buried in monthly payments it is nearly impossible to climb out from underneath them.
Perhaps the most effective way to look at credit is as a means of borrowing money from your future self to satisfy a current want or need. By choosing to get something now, you consciously (or subconsciously) make several assumptions:
Human beings are hard-wired to emphasize present needs and wants above past rewards or future consequences. This long-embedded survival mechanism was beneficial when our ancestors were on constant alert for a scarce supply of food and shelter. However, now that most of our core needs are already satisfied, it can be equally detrimental; especially with endless credit at our fingertips.
For example, at the beginning of the month you decide to splurge on some new wardrobe items. You opt to cover the $500 in spending with your credit card. Everything is on sale, so you justify paying a little bit of interest – believing the final cost will still be lower than if everything were purchased at full price. You absolutely love the items and figure you'll get at least a year or two of wear out of them.
By the end of the month, the dust has settled on your clothing purchase and you again find yourself out shopping. This time, you're at the furniture store. You see a pair of end tables that would look perfect in your living room. Telling yourself how timeless and useful they are, you go through a similar process and quickly add another $750 to your credit card balance.
These are two separate and completely isolated spending decisions by your present self. When you were clothing shopping, you didn't anticipate furniture shopping in the weeks ahead. By the time you arrived at the furniture store, the excitement and reward of your clothing purchase had long since subsided. However, your future self is still responsible for covering the entire $1,250 tab you've racked up over that 30-day period – monthly payments, added interest, reduced savings opportunities and all.
How likely is this cycle to repeat itself next month? What happens the next time the urge to spend overwhelms you? Will you remind yourself of the debt you've already accrued? After all, you don't have to worry about paying for it now. It's an abstracted, wealthier, more fulfilled version of you who will pick up the slack.
The average Canadian is currently more than $22,000 in debt, not including mortgages. In many cases, this is exactly how they got there. One purchase at a time, telling themselves it will be worth it, believing they can make the payments and promising no more spending until they've paid everything off. But then something else comes up – a can't miss seat sale to their favourite holiday destination, a water heater that needs to be replaced, bonus rewards on their next grocery purchase, Christmas gifts, etc. And, so the cycle repeats itself – convenient, easy and easily avoided for another month until the next statement arrives in their mailbox.
Protecting your financial future is not a responsibility you can entrust to the impulsive, reward seeking present self. Rather, you need debt-defeating systems in place which outsmart the persistent and persuasive voice that encourages you to spend and outwit the multi-billion-dollar debt industry which relies on you listening to it. These systems will promote saving enough to make for purchases in full, they will emphasize paying off existing debts before taking on new ones and they will prioritize setting money aside for emergencies so unexpected situations aren't made worse or more expensive by the cost of interest. It may hurt slightly in the moment, but the discomfort is nothing compared to the triumph you will feel not being burdened by the trappings of a younger, less wise, less wealthy version of yourself. That person may seem a long distance away, but it will be you sooner than you think.
The consequences of the decisions you make now will determine the quality of life you will eventually have to live. Deciding what is worth having now is the same as deciding what is not worth having in the months and years to come – whether that means money or debt, a short-term reward or long term financial freedom is completely up to you.
Based out of Kelowna, Darrin Surminsky is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 1.877.898.2580 or toll-free at 310.DEBT (310.3328).
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