In today’s way of living, most people don’t consider charging something to their credit card as having spent the money; they only look at their minimum monthly payment as the way they spend money.  To make matters worse they consider the credit cards’ monthly payment a given, just another monthly payment at the same level as the electrical bill, water bill, rent, phone . . .  a utility of some sort.  This habits leads to the misconception, helped by many years of advertisement, that the sticker price is not as important as the monthly payment.
For instance, take the process of buying a car, car A has a price of $17,000 and can be financed for $390 per month for 48 months (4.74% interest), while car B has a price of $20,000 and can be financed for $331 per month for 72 months (5.99% interest).  Most buyer will disregard the  price of the car, the interest rate on the loan (interest rate = the price of money), and the length of the loan and look solely at the monthly payment, buying car B because it has a lower monthly payment. In reality Car B will have a much higher TCO (Total Cost of Ownership), since a higher priced car will surely translate into higher costs such as sales tax, excise tax, insurance cost; and generally speaking, higher priced cars have higher maintenance costs, and higher gasoline consumption.
The correct way to look at these transactions, is that once you charge something, or have signed the car loan documentation, you have indeed consummated the transaction; you’ve bought the car or the TV, and now you have a loan servicing agreement with the credit card company or the auto loan lender. Think of it as two separate events: in the first event you were given money in your hands (in exchange for the loan), in the second event, you have turned around that cash and given it to the seller of the car or the seller of the TV. Soon you’ll forget the excitement and novelty of the new car or the new TV, but you are stuck with the loan payments for a very long time.

The “I already paid that off” syndrome.  Once you get into the game of revolving balance on your credit cards, whether you transfer from one card to another, or pay it off using a home equity line of credit, is is a condition, that persists until your total consumer debt is back to zero, as in $0.00.  That trip that you took 10 years ago, adding to your pre-existing total balance. If you still carry on consumer debt, you haven’t really paid it off, you’ll never pay off.  The rule of thumb is this: is your total consumer debt (all debt except your manageable mortgage, manageable car loan, and in some cases – but not all – manageable student loans) decreasing on a monthly, quarterly, and annual basis?  Numbers don’t lie.  If you are playing the trick or robbing Paul to pay Peter, moving balances from one card to another one, charging monthly expenses like grocery or gasoline and then rolling over the balance every month in order to pay that 3 month overdue electrical bill, or if – even worse – you take cash advance to pay your rent or mortgage; stop fooling yourself, you are living beyond your means, and you might be in trouble.  Stop fooling yourself, and take action to change things around.

The fist step you can take is to stop adding to your existing credit card debt and consumer debt,  this includes bank lines of credits.  You’ll need to cut your expense.  The secret of cutting your expenses is to eliminate as many expenses as possible: do you really need 300 cable channels?  Dinner our is not a necessity, nor is take out food.  The other addendum to the secret of cutting your expenses is to curtails those expenses that you could not eliminate.  When was the last time you bought generic brands at the grocery store? In a blindfolded test, would you be able to tell the difference between the brand name peanut butter and the store brand? Try the blindfolded test on your significant one or your friends, you might actually like the store brand more, and save 30%-40% in the process.  How much do you spend in grocery and food in one month?  The typical family of 4 spends between $600 and $900 in grocery, dining out, and take out food (including buying lunch) per month.  If you are in financial trouble start brown bagging your lunch, eliminate dining out and take out food, switch from buying prepared food to buying ingredients and cook, switch from brand names to generic; this way most family can cut their “food” budget by a factor of 40%-50%, even more in some cases. Could your family use an extra $5,400 per year?

Take a hard look at the choices you make when it comes to money, are they really YOUR choices, or are you being influenced by externalities like ‘everybody does that’, or advertisment?  Regain control of your finances and your life, and free yourself from unnecessary debt and habits.  It might be the best present you could ever give yourself or your family.

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Photo Credits: LyzaDanger (cc)