Tuesday, August 06, 2013

Cutting the Debt Fat!


Whenever we spend more than our income, we are overspending. For some of us, overspending can be almost unconscious -- we buy that latte from Starbucks, the latest new fashionable shirt (that has been marketed to us), and then go out to dinner without adding up the costs in our head, much less on paper. More often than not, we're not even aware of the hole we've dug ourselves into until it's too late. Too late meaning – feeling depressed, not having the ability to take care of payments, and end up trying to keep our heads above water versus saving for our future. That said, it’s time to reign in the spending and live within our means.

5 Common Reasons for Overspending

Following are five common reasons people overspend -- if you recognize any of these, see if you can weed out that behavior from your financial life. 

1. Peer pressure.  Sales & marketing is a multi-billion dollar industry that strategizes ways to market to the consumer. And guess what, many of us fall for it. In addition, many of us feel pressured by friends to spend money they don’t have. Perhaps your friends want to go grab dinner, see a movie, or buy tickets for a concert. You want to go, but you don't have the money. If you can be honest and live within your means, you'll not only prevent yourself from financial troubles, but you also may find that you've helped others have the courage to make better financial choices for themselves. 

2. Want to feel good NOW. Your life is full of stress, obligations, demands, schedules, assignments, and papers that are due. Sometimes you just want a break. You want a reward, so you buy some new clothes and enjoy a night out with your friends. You might feel better for a while -- until you get the bill. Better to treat yourself with small, affordable rewards than continue to overspend. 

3. Don't have, or ignore, a budget. If you've never set a budget for yourself, you may not have considered the benefits of tracking your spending. Picking up a coffee on the way to class each morning, spontaneously meeting a friend for a movie, or doing some late night online shopping are all activities that can add up quickly. Having a budget makes it easier to know what you can afford, and what you can’t. 

4. Keep up with neighbors and friends. Your buddy has a flat-screen TV? Your friend has a trendy new outfit? We often think we should be able to have everything our friends have, but many times we can't. While we all need rewards and treats once in a while, you'll find a lot more joy in paying for what you can afford than stressing about your upcoming credit card bill. 

5. Addictive spending. Just as people become addicted to gambling, alcohol, or cigarettes, a person can become addicted to the emotional high of spending. If you find that you are having problems with spending and debt -- if you feel like you can't control your spending or you think a lot about how you can spend money -- get help!

Overspending = Debt

Unfortunately, overspending typically leads to large amounts of debt. That debt then needs to be repaid—with interest! Consider this example:

New college graduates carry an average credit card balance of $3,000. Let's say you’re lucky—or better yet, careful—and you accumulate only $2,200 in credit card debt. Your interest rate is 18 percent and you pay the minimum amount ($40) each month on your card without any further purchases on your card. How long will it take to pay off your balance? Did you guess five years? Try 10. It will take almost 10 years to pay off the debt. Your total cost will be $4,680 (original balance of $2,200 plus $2,480 in interest).

Your best bet is to get overspending out of your life, so that you can focus on the unavoidable debt you will face in the future. Time to cut out the debt fat out of our diets!

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