By Kali Hawlk, CommonSenseMillennial.com
Trendy outfits. Stylish furniture. Fancy vacations. Latest and greatest tech tools and gadgets. New cars. Bigger homes. This list of things people want and can’t get enough of could go on and on — because the temptation to spend money we don’t have is everywhere in our consumer-driven society.
We’re tempted to buy ourselves a little happiness with a new shirt, a fun piece of decor for our living space, or a snazzy smartphone case (that we somehow see as better than the other three we own but don’t use).
We treat ourselves with expensive coffee drinks, over-complicated cocktails, and meals that someone else prepared. We work hard, so we deserve it.
We want to keep up with the Joneses, or at least our peers. We don’t like feeling left out and owning less can often feel like amounting to less.
The temptation to spend isn’t difficult to explain, but that doesn’t mean it’s justified or no big deal. Here’s the problem: spending temptations, when left unchecked, lead straight to debt temptations.
When a Little Extra Spending Turns into a Whole Lot of Debt
Will a $4 latte that you buy on occasion after a rough day at work put you in the poorhouse? Unlikely. The problem occurs when you consistently make the mistake of spending just a little too much money — a little too much more than you actually have in your checking account to cover. “A little extra spending” quickly evolves into a financial mess when you charge purchases to your credit card and don’t pay that balance off in full.
“Not paying attention to where your money is going is what leads people into debt,” explains Sam Farrington, founder of SoundMind Financial Planning and member of XY Planning Network. Failing to track your spending or keep a budget leaves you more susceptible to overspending and living above your means.
As the old adage goes, you can’t manage what you don’t measure. Measure your money so you know you’re living in your means and not spending more money than you actually have.
The Number One Debt Temptation
You’d think that saying “don’t spend more money that you have” would be one of the most intuitive personal finance fundamentals out there. But many people find this exceedingly difficult, thanks to the top debt temptation: credit.
Lines of credit — usually associated with credit cards when we talk about debt — enable you to literally spend more money that you have access to via cash (in something like a checking or savings account). “The reality is that the credit card temptation will become your biggest financial snare down the road once the balance becomes unmanageable,” says R. Joseph Ritter, Jr. CFP® of Zacchaeus Financial Counseling, Inc.
It’s incredibly easy to open a credit card account, charge a purchase on the card, and forget about it until about four months later when your balance is steadily accruing interest. And just like that, you’re in debt.
Debt Temptation Intensifies When Credit Card Companies Sweeten the Deal
Credit cards may serve as an even bigger temptation when they’re rewards credit cards. Users may feel like they’re getting an amazing deal by opening up credit cards to get discounts, free items, statement credits, and points for fun and exciting experiences like travel.
According to Dennis M. Breier, president at Fairwater Wealth Management, “one of the biggest debt temptations, especially for young professionals, is putting vacations or large purchases on credit cards in order to get the points.”
While things like travel hacking — which involves taking advantage of credit card signup bonuses to earn massive amounts of reward points to score free airfare and hotel stays — can be beneficial, the temptation to go beyond your normal, everyday spending chasing after those points can be too much for some.
That’s where savvy consumerism abruptly ends and financial trouble begins. It’s tempting to open — and use — more credit cards than you need. It’s justified because you got a free airline ticket, right? Not when you had to spend $3,000 you didn’t have to score a flight that retailed for $300.
“Many young people will book a trip or buy something expensive with their card to get rewards points because it sounds smart. However, they won’t immediately pay this debt back,” says Breier. The temptation to use the card to feel “rewarded” is strong, and it can quickly leave you with a mass of credit card debt if you don’t have a plan to manage and pay your balances in full and on time each month.
Debt Temptations Go Beyond Plastic
Credit cards aren’t the only kind debt temptation out there — although they may be the easiest to give in to. Other types of credit, like auto loans, lure many into financial situations they can’t afford to get out of.
“Two of the biggest temptations include relying on credit cards and buying a car,” says Ritter. “Although the monthly payment makes a new car seem affordable and the new car smell is tempting, in the long run you will spend a lot less money on cars by buying a car that is several years old.”
Mark and Lauren Greutman, money management experts at MarkandLauraG.com, agree and also suggest buying used. “New cars depreciate by 20 percent right after driving off the lot,” they explain. “If you want a new looking car, I suggest buying a two year old car that was previously leased. You will get that new car feeling, but without that hefty depreciation.”
Avoiding Debt Temptation by Using Credit Cards the Right Way
Buying a used car instead of a brand new one is a simple and easy fix when it comes to avoiding debt temptation in our vehicles. Figuring out how to use and manage credit cards properly, however, is a bigger challenge for many.
Michelle Black, author and credit expert at HOPE4USA.com, believes that improper attitudes towards credit card usage serve as the biggest trigger to overwhelming debt. She suggests that, even though you may have a larger line of credit than you do cash balance in the bank, you need to think of your credit in the same way you would cash.
“Credit cards should be treated just like your bank account: if you don’t have the money to pay off the bill right that moment then you should not use your credit card to make the purchase,” explains Black. “Resolve to never revolve a credit card balance from month to month,” she advises consumers. “Your wallet and your credit scores will thank you.”
Black also wisely points out that just because credit cards can lead us into debt temptation, we shouldn’t label all credit cards as “bad.”
“The cash and carry crowd will lead you to believe that the only way to achieve true freedom from debt is to avoid credit cards all together,” she says. “However, that is not only bad advice it is also insulting. If you develop true financial discipline then it is no harder to avoid overspending on a credit card than it is to avoid overspending the funds in your bank account.”
This is where financial education and literacy become critical. Credit cards — and other financial products that allow us to borrow money for a period of time — can be useful tools when we understand how they work and how to use them to our advantage.
It’s important that we can identify our debt temptations. But it’s just as important to realize that we’re not fated to give in to them. With the right knowledge and information, we can make empowered financial decisions to avoid temptation while making the most of powerful financial tools available to us.