Personal finance is all about psychology. If you start carrying a balance on your card, you are teaching yourself to spend more than you earn. You will become accustomed to spending salary+credit every month (lifestyle inflation - where your spending increases in step with your available funds - is a real thing), until you hit the wall.
The wall may be when your credit runs out (and you can't get a new card or an increased limit), or it may be when your minimum payments have grown to the point where you can't afford them. Either way, suddenly your salary+credit equation will break down. You will have to switch overnight from living on more than your salary provides to living on far less, because your monthly income will have to be used to pay the money back as well as pay for you to live.
Adapting to a major lifestyle downgrade is really, really hard - so hard that even rich bankers and footballers get caught out by it if they don't get their bonus or retire from the game. Seriously, read up on the bankruptcy rate for retired sportsmen.
Never carry a balance on your credit card - it's the first small step along a road you never want to walk down.
Showing posts with label money. Show all posts
Showing posts with label money. Show all posts
Don't Expect A High Standard Of Living Immediately
At the time I write this, the world is still in the aftermath of the credit crunch and many are still struggling. During the housing boom that preceded the crunch, a lot of people were borrowing far too much money to buy houses and then taking loans against their equity when house prices rose again. This money was spent on flash cars, exotic holidays, new gadgets, expensive furniture, and so on. People just out of college were living in bigger houses and driving newer cars than their parents, and thought this was the way of the world and the natural order of things, that the standard of living increased with every generation.
Post-crunch, this view flipped and a lot of people complained at length that the 'boomer' generation (born in the years immediately after WW2) had it easy and ruined the economy for everyone else. They pointed out things like inflation-adjusted salary comparisons and so on to argue that the standard of living had dropped. They rarely conceded that the boomer generation when young had smaller houses, no computers or consoles or washing machines, one car per household, one TV per household, and so on. They argued that people were 'forced' to live beyond their means in order to have a 'normal' standard of living.
If you were so inclined you could spend your whole life arguing about stuff like this. It isn't worth it. I want you to take from this a sense of perspective. When you move out of the family home, you should not expect to maintain your standard of living immediately. You shouldn't expect to move straight into a similar-sized house or drive a fancy car. Your mum and I bought our house at age 34, not at age 23. We both owned houses before buying this one. I had savings, your mum had equity from the housing boom of the early-2000s. We had a windfall earlier that year, which we saved instead of spending. We had no debt, and good credit ratings. A lot of things had to align for us to move here, it didn't just fall into our laps - and the ideal home won't just fall into yours. It takes time.
When I graduated, I lived in a shared ex-council-house in Crewe, with two strangers who relied on housing benefit for rent. One of them used to secretly pawn my N64 games to pay for tobacco. There was no upstairs bathroom. The power was on a meter, and every other month we either forgot or couldn't afford to top it up and had to sit there in darkness with no electricity until the corner shop opened. The kitchen was an unusable mess, so I used to eat crisps for breakfast and get takeaway doner meat and chips for dinner, every day.
When your mum got her first house, her neighbour was mentally unstable and used to put dogshit through people's letterboxes.
It sucks, but that's what you have to put up with when you're starting out.
When you get your first house, you will have less space than you are used to. You will have to put up with annoying neighbours and dickhead housemates. You will be less comfortable and have fewer amenities than you are used to. You will also have a great deal more freedom and fun than you have had before, and that will make up for it.
That's all OK, it's part of the process. Do not feel like your salary is inadequate, and do not feel like you ought to have all these fancy gadgets and must go into debt to get them. You cannot expect to have the same standard of living in your first year of work as people who have worked and saved and learned from their mistakes for 30 years or more - but you can get there as long as you don't bury yourself with debt to start with.
Post-crunch, this view flipped and a lot of people complained at length that the 'boomer' generation (born in the years immediately after WW2) had it easy and ruined the economy for everyone else. They pointed out things like inflation-adjusted salary comparisons and so on to argue that the standard of living had dropped. They rarely conceded that the boomer generation when young had smaller houses, no computers or consoles or washing machines, one car per household, one TV per household, and so on. They argued that people were 'forced' to live beyond their means in order to have a 'normal' standard of living.
If you were so inclined you could spend your whole life arguing about stuff like this. It isn't worth it. I want you to take from this a sense of perspective. When you move out of the family home, you should not expect to maintain your standard of living immediately. You shouldn't expect to move straight into a similar-sized house or drive a fancy car. Your mum and I bought our house at age 34, not at age 23. We both owned houses before buying this one. I had savings, your mum had equity from the housing boom of the early-2000s. We had a windfall earlier that year, which we saved instead of spending. We had no debt, and good credit ratings. A lot of things had to align for us to move here, it didn't just fall into our laps - and the ideal home won't just fall into yours. It takes time.
When I graduated, I lived in a shared ex-council-house in Crewe, with two strangers who relied on housing benefit for rent. One of them used to secretly pawn my N64 games to pay for tobacco. There was no upstairs bathroom. The power was on a meter, and every other month we either forgot or couldn't afford to top it up and had to sit there in darkness with no electricity until the corner shop opened. The kitchen was an unusable mess, so I used to eat crisps for breakfast and get takeaway doner meat and chips for dinner, every day.
When your mum got her first house, her neighbour was mentally unstable and used to put dogshit through people's letterboxes.
It sucks, but that's what you have to put up with when you're starting out.
When you get your first house, you will have less space than you are used to. You will have to put up with annoying neighbours and dickhead housemates. You will be less comfortable and have fewer amenities than you are used to. You will also have a great deal more freedom and fun than you have had before, and that will make up for it.
That's all OK, it's part of the process. Do not feel like your salary is inadequate, and do not feel like you ought to have all these fancy gadgets and must go into debt to get them. You cannot expect to have the same standard of living in your first year of work as people who have worked and saved and learned from their mistakes for 30 years or more - but you can get there as long as you don't bury yourself with debt to start with.
Always Pay Your Credit Card In Full
Credit cards are a financial chainsaw - a very powerful and useful tool that can eviscerate you if not used properly. There is a golden rule for using them: ALWAYS PAY THE BILL IN FULL, EVERY MONTH, WITHOUT FAIL.
This is not a joke.
I mean it.
It is very tempting, when you get your first credit card, to spend lots of money on it. You can spend a month's salary, and when the bill comes you only have to pay an hour's wage. When you hit your credit limit, the card company will probably increase it for you with a single phone call or visit to their website. Brilliant, eh?
No. Elsewhere in these notes I will talk a lot about compound interest and how it will make you rich. Well it works in reverse - the credit card company will get richer at your expense if you carry a balance. You will get poorer at an even-faster-and-ever-increasing rate than compound interest makes you richer. You don't want that. Come and ask me if you want to work through some numbers to see just how bad it is.
I've been there and done this. Through my 20s I racked up debt on a credit card, bought movies and videogames and wine and so on. I imported consoles from Japan. I went skiing every year on the bank's dime. I bought fancy Lego Technic sets that I never built. Small things, but they all add up. I was lucky enough to catch myself before it got out of hand (total debt topped out at about half my annual salary at the time) and was lucky enough to be earning a decent salary that allowed me to make my payments without having to live on beans on toast for a decade. Not everyone is so lucky. It's far, far better never to dig yourself into a hole than it is to be good at climbing out of it.
Learn from my mistake. Always pay the full balance every month.
This is not a joke.
I mean it.
It is very tempting, when you get your first credit card, to spend lots of money on it. You can spend a month's salary, and when the bill comes you only have to pay an hour's wage. When you hit your credit limit, the card company will probably increase it for you with a single phone call or visit to their website. Brilliant, eh?
No. Elsewhere in these notes I will talk a lot about compound interest and how it will make you rich. Well it works in reverse - the credit card company will get richer at your expense if you carry a balance. You will get poorer at an even-faster-and-ever-increasing rate than compound interest makes you richer. You don't want that. Come and ask me if you want to work through some numbers to see just how bad it is.
I've been there and done this. Through my 20s I racked up debt on a credit card, bought movies and videogames and wine and so on. I imported consoles from Japan. I went skiing every year on the bank's dime. I bought fancy Lego Technic sets that I never built. Small things, but they all add up. I was lucky enough to catch myself before it got out of hand (total debt topped out at about half my annual salary at the time) and was lucky enough to be earning a decent salary that allowed me to make my payments without having to live on beans on toast for a decade. Not everyone is so lucky. It's far, far better never to dig yourself into a hole than it is to be good at climbing out of it.
Learn from my mistake. Always pay the full balance every month.
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