Consumer debt is one of those things that most of us have at least a little experience with. Unfortunately though, far too many of us have more experience with it than we'd like! In this article, I'll show you the ugly truth about consumer debt, and why it's such an insidious monster that keeps you from living the life you really want to live.
How Consumer Debt Happens
It may have started just after finishing high school or college. You graduated, got a full-time job, got your first credit card, got a car payment, and it snowballed from there.
Pretty soon your 10, 20, 30 years in, and you’re wondering why you’ve never been able to save any money.
You’ve been living paycheck to paycheck for years. No matter how many raises you get or side hustles you do, it's never enough to make ends meet.
You’re afraid you’ll never be able to retire, and you will have to scrape by on Social Security when you get older.
Unfortunately, this is the story of the average American.
What’s the deal?
2 Factors That Determine Your Fate
In most cases, it comes down a couple of simple factors that ultimately determine your financial fate:
- You don’t manage your money as well as you should.
- You’re stuck in consumer debt (see #1)
Consumer Debt and The Average Joe
Unfortunately for most of us, debt is a normal part of life. It has become part of the mindset of our culture so much that, if you don’t have any, people tend to look at you kinda funny.
For the average Joe, living a debt free life sounds like a great idea, but it doesn’t seem realistic or achievable.
So, Joe just continues to use consumer debt throughout his life. Credit card bills, car payments, student loans, and home equity loans are just “normal”- everybody has them.
He’s doing the same thing all his friends are doing. He never makes much progress financially, unnecessarily giving away tons of his hard-earned money in the process.
Is Debt a Necessary Evil?
Most people think that debt is just a necessary evil and there’s not much you can do about it.
After all, how can you afford a car without a loan?
How can you pay for your kid’s college?
Where do you get the money when the refrigerator dies or the roof springs a leak?
Unfortunately, most just whip out the credit card or go see the loan officer at the bank. But is that the best strategy?
I don’t think so.
In fact, it’s really not a strategy at all.
What it really is, is a reaction to a financial situation that could have been avoided with better planning.
Debt usually happens when you don’t have a financial plan.
Consumer Debt Has a High Cost
Debt has a funny way of sneaking up on you. At first you get just a little bit, and it seems manageable. Easy monthly payments are much easier than dropping a pile of cash for a large purchase, right?
But the problem is, there are costs that come with using consumer debt. The more debt you have, the less money you get to keep for yourself.
Easy monthly payments sound great, until you understand how much they really cost.
Paying interest and fees keeps you poorer and in long term financial bondage, making financial success elusive, and perpetual paycheck to paycheck living a reality.
[tweetherder]The ugly truth about consumer debt- why it's a loser's game…[/tweetherder]
You Spend More When You Use Debt
One of the interesting things about using debt to fund your life, is that you tend to spend more when you use it to fund a purchase.
For instance, studies show that when you use a credit card, you tend to spend about 12% more at the point of purchase than if you had paid cash.
The reason is because it doesn’t feel like you’re using real money. It’s far easier to swipe and sign than to use physical cash to make a purchase.
The less real that money feels when you spend it, the more you tend to spend. This is true with everything from credit cards, to car loans, to mortgages, and any other kind of debt.
Think about it- you’re paying extra money (interest) on purchases that tend to be higher because your financing them. It’s a double whammy that makes you poorer while your bankers get richer.
Who would you rather have that money, you or your bankers?
How Consumer Debt Hurts You
Let’s look at a couple of examples below of how consumer debt negatively affects your wallet on a daily basis.
More than half of all people with credit cards carry a balance from month to month. If you’re doing this, it means you are constantly paying the credit card company interest for the privilege of using their money to fund your life.
Essentially, when you use a credit card, you are putting your purchases on a payment plan.
Does it really sound like a wise idea to put coffees, restaurant meals, gas, clothing, and everything else on a payment plan?
Of course not!
Would you pay $10 for a coffee that costs $5? Would you willingly hand over $50 for a meal when the menu clearly states the cost is $25?
Most people would agree that paying double the price for anything is foolish. But if you carry a balance on your credit cards every single month, this is essentially what you’re doing- especially if you’re paying the minimum payment every month!
Here’s a great example about the cost of credit card debt from one of my blog posts:
32 Years to Pay Off a Tank of Gas?
If you make easy, affordable, minimum credit card payments, it will take you 381 months (32 years!), to pay off your balance, assuming you NEVER use your credit cards again during that time.
You would have paid off the entire $9,100 in credit card debt plus $10,113 in interest for a total of $19,213.
In the example above, you see that for all that stuff you paid for with those credit cards, you ended up paying more than DOUBLE the actual cost.
That’s 32 years to pay off those happy meals and latte’s.
32 years to pay off the cute shoes and gas for the car.
This, my friends, is STUPID!
If you’re paying minimum payments on your credit card debt, or if you’re using credit cards at all, you have to wake up at some point and realize the credit card companies always find a way to keep you in perpetual debt. That is their job, and they do it well.
Credit Cards Keep You Poor and Broke
I don’t care how much you think you need a credit card- you don’t! Angie and I haven’t owned a credit card in over 12 years now, and we don’t miss ‘em!
Carrying a credit card balance every month is keeping you poor and broke. It’s time to understand that there is a better way!
You should make it your goal to completely eliminate them from your life!
Another type of consumer debt plaguing the finances of so many people is car payments.
This is reflected in the fact that over 85% of new cars in the U.S. are financed with a loan or a lease.
The common belief is that cars are so expensive, there’s no way you can pay for a car without a loan.
That’s a load of B.S.!
People do it every day (and I’m not talking about rich people either)!
In fact, Angie and I have paid cash for our last 4 vehicles, and our kids both paid cash for their first cars as well!
Let’s look at an example of how much a typical car loan depletes your hard-earned money:
This example uses average car loan stats for 2018
Let’s say you decide to buy the average new car for ~$31,000. You give the dealer a down payment of $2,000 and decide to finance the remaining $29,000 at 5.17% for the national average of 69 months.
Over the life of the loan you pay $4,620 in interest.
So this means you’re paying an extra $803 a year for the privilege of financing a car that is also dropping in value every year!
That’s $803 every year you could put in the bank, into investments, or to feed your family with!
Combine this with the interest you’re paying on some good old credit card debt, and you’ll see that consumer debt is still not your friend!
Credit Scores- What the Banks Want You to Believe
The big banks have convinced us that in order to get by in life, a good credit score is extremely important.
But that's not the truth.
Maybe a high credit score is good if you want to borrow money all the time and stay in perpetual debt. But you don’t have to roll that way!
Think about it- when you have no debt, you don't need a credit score!
Contrary to popular belief, you don’t need a credit score to get a mortgage, rent a house, or qualify for a job.
There are ways to deal with those situations that don't require running up debt to get a good credit score.
I've written quite a few articles about credit scores and why you don't need them. You can find them in the resources section at the bottom of this page.
Personal Loans, Payday Loans, and More
If you have other debt, such as payday loans, personal loans, home equity loans, or any others, these are depleting your hard-earned money even more- every single month!
You are losing thousands of dollars every year! Here are a couple of articles to explain:
What is a Payday Loan and Why is it So Bad?
Why a Home Equity Loan is a Terrible Idea for Paying Off Debt
Debt is a Loser’s Game
When it comes down to it, using consumer debt to fund your life is a loser’s game. The more you have, the more you become backed into a financial corner that limits your options in life.
At some point, you have to decide if it’s really worth it.
Then you have to decide you’re going to do what it takes to get rid of your consumer debt for good.
The Good News
Whether you make a six-figure income, or you’re making a below average income, the good news is that you can live without consumer debt!
You will have to change your mindset, and especially your habits.
It will take a while to turn the ship around (anywhere from a few months to a few years).
But when you get mad enough make the effort, I guarantee you that it’s worth it!
Angie and I are Living Proof
It took Angie and I several years of paying off credit cards and car notes before we could say we were done with consumer debt. But since then, we have been able to pay cash for everything, including:
- 5 cars
- 12 years of college (4 degrees)
- Every single vacation for the last dozen years or so
- Our daughter’s wedding
Some of these large purchases were made even while my income had been cut in half due to the Great Recession!
The Real Truth About Consumer Debt
The real truth about consumer debt is this- YOU DON'T NEED IT!
If you want to continue to live paycheck to paycheck and waste your hard earned money year after year, then by all means, stay in debt!
But if you want to live a life of financial freedom. If you want to experience all the great things that come with it, then you need to make a decision to get out of debt- NOW.
It doesn't matter if you have a low income.
It doesn't matter if you don't know where to start (you can start here) (or you can start here).
It won’t come fast, and it likely won’t be the easiest thing you’ve ever done, but if you stick with it and follow the plan, you will reap incredible rewards that ultimately brings a new level of peace and freedom to your life!
Resources for Getting Out of Debt
The Celebrating Financial Freedom online course
Master Your Money- Free 10 Day Email Course
Blog Post About Getting Out of Debt
How to Get Out of Debt- The Ultimate Plan for Getting Out of Debt, Even if You Have No Money
10 Tips For Negotiating With Debt Collectors- Know Your Rights!
How to Achieve Debt Freedom Without Sacrificing the Fun Stuff
5 Steps for Getting Out of Debt You Can Do Right Now
13 Awesome Tricks for Negotiating Credit Card Debt
3 Bad Options for Getting Out of Debt
Blog Posts About Credit Scores
You DO NOT Need a Credit Score
How to Increase Your Credit Score Without Using Credit Cards
How to Live Without Credit Cards- It's Easier Than You Think!
Living Without a Credit Score- Your Questions Answered
You Don’t Need a Credit Score, Here’s an Alternative