Posted on October 24, 2016
Feeling stupid can make you smarter
I am a strangely private person for someone who is probably known as the most extroverted person in my group of friends. When I started this blog I kept it on the down-low, choosing not to let friends read it. I have since lifted that rule somewhat so we will see how that goes but I am still choosing to be mostly anonymous.
The reason to keep hush about this blog has a lot to do with not only working in social media but also being a huge consumer of it. I think many of us can’t read a post or a tweet without automatically assuming that the writer is discussing us specifically. Or we all know people who feel like tearing everything apart like it’s their job, “But…but…but…what about this esoteric instance that may occur when the sun is in Saturn!” they snivel on facebook after someone posts an article they feel is a personal affront (for some reason?). I know this may be shocking to some: but not everything is about you. And since I couldn’t control the reaction to my blog, I originally controlled the access.
Being interested in personal finance is like putting a giant magnifying glass on yourself because it’s a highly contentious topic. If I discuss our choices and goals, someone else is quick to point out how impossible it is, or makes excuses as to why they could NEVER do THAT. That’s fine, I don’t really care to hear the million-and-one reasons why someone would never make the choices we make. I am being completely honest when I say that is the one key thing about personal finance is that it’s personal.
Still, I think there are some situations that affect all of us whether or not we are willing participants. I think also it’s important to be cognizant about the way things affect us and how things affect others, too. I know some people will get their backs up because ZOMG STOP JUDGING ME but honestly, I generally don’t care what people do with their money but I do think certain decisions are stupid and I am not going to change my mind just because someone’s fee-fees are hurt.
Where you are financially does not dictate your worth, nor does it say anything about you as a human being. However, sometimes we are feeling judged because we have made bad decisions, we know we have made bad decisions, and watching someone else say in a completely different circumstance, “damn, that a dumbass decision,” can make us feel shitty to our core. I get that, but there is no time like the present to change things!
A tale of two minimum payments
Still, some people are so contradictory and they don’t even realize it because they don’t think about it. A couple of years ago I saw someone post on a forum about how they NEEDED to use debt to finance certain parts of their lives. They apparently used their credit cards to take time off work so they could do volunteer work to serve poor communities. If there was no credit, this man claimed, he’d never be able to do the all good work he does. Unfortunately this is ridiculously backward to me. Why? Because credit card companies rely on people who pay their minimum balances to support the systematic destruction of poor people. They over-lend at ridiculous interest rates to people who they know will have a hard time paying back that money. Knowing that most people will desperately try to meet their minimum payments, people of few means will try and keep up as long as they can. Of course, many of them fall behind when faced with an emergency because they are already maxed out. Because the credit card company is happily collecting minimum balances from middle class folks, they are still collecting piles of cash as they start going after the people who can’t pay with fees, higher interest rates, and of course the threatening – and mostly illegal – telephone calls at home and at work. So this person was arguing that they were using a method that oppressed poor people to be able to help poor people. I would argue that playing into the credit game is marginalizing them further. it would be smarter to get the credit under control and find other ways to assist.
I mean, does no one remember 2008? They gave sub-prime loans to individuals who were not mentally capacitated enough to actually sign legally binding agreements.
Of course, the more libertarian-minded of you will point out that most people chose to sign up under those terms and it is their fault if they can’t meet their obligations. But credit card companies aren’t stupid, they have actuaries that calculate the risks of these approaches. Despite the fact that someone who makes minimum wage should never qualify for a $40000 truck loan, they often do. “It’s only $200 a month, surely a successful person such as yourself can manage that, isn’t she a beaut!?”
These companies rely on a certain ignorance from the population to support their business model. They make the terms complex and full of legalese, and when you are in a desperate situation – such as living below the poverty line – you can’t make a logical, free decision because you are grasping at any branch that may pull you out of the quicksand. To argue that it is just good business is to assume we are all standing on the same starting line, which we are not.
So in my view, I would rather not carry a balance on my credit cards knowing that my payments would be contributing to this system. Instead, I use the grace period to let my own money collect interest, and pay it off before accruing interest.
Ok, but what if we all did that…
We don’t. If we did, the companies would start reigning in the bajillion credit card offers there are available every day. It’s a business model that has served them very well over the years and will probably continue as more and more people rely on credit to feed their lifestyles.
The best thing you can do for yourself, your family, and for the world at large is to climb your way out of debt. It may not be tomorrow, it may not even be until a couple of years from now, but the single most important change you can make to your life is to get out of debt.
You can argue with me until the cows come home about how you NEEDED to put stuff on credit for whatever reason but the reality is that it doesn’t affect my life one way or another. In the past, I, too, have used a lot of credit I couldn’t pay off quickly and I will be the first to tell you how ridiculously dumb that was.
How dumb? Generally speaking, a minimum payment covers your interest, plus about 3% of the principal, so here is a fun game you can play at home using a minimum payment calculator. The average interest rate this week according to creditcards.com is approximately 15%, so to pay $2000 assuming that most minimum payments are your interest rate plus that 3% of the principal, it would take you 10.8 YEARS of paying $60 a month and your total out-of-pocket costs would be….
-3,222.34 or MORE THAN 60% of the money you originally borrowed.
Conversely, for giggles let’s put that money in an index fund earning 7% instead!
So basically, you can have $10500 in 10 years, or pay -3222. What sounds better to you? It’s a decision that has a potential $13700 consequence attached to it! Wowzers!
In the end, the gentleman who did the volunteer work could not be swayed by the discussion, which is often the case for people who are looking for validation and back-patting. We all want our friends/family/the internet to tell us that our reasons are justified and some people when faced with the reality end up doubling-down and digging deeper into their own messes. His life doesn’t affect any of us really but imagine had he donated that $10500 to alleviate poverty in his community?
Now let me blow your mind: do the above math taking into consideration that the average U.S household carries $15,675 in credit card debt alone.