The Things You Own Own You, Pt.2

Fixed expenses are only one of the things crushing your financial independence. The other big weight is, as you might guess, variable monthly expenses.

Some of what I call fixed expenses can actually vary quite a bit from month to month (mainly utility bills), but you know that bill is going to be there every month, and you probably have a pretty good idea what it’s going to be. Variable expenses aren’t necessarily there every month. You’re always going to have an electric bill, but you aren’t going to buy a big screen TV every month (at least I hope not).

Some variable expenses are unavoidable, like home or car repairs, or medical bills. They certainly need to be taken care of when they come up, but you can’t really budget for them. The other variable expenses are entirely under your control. These are the things you buy every month, because you want, or need, or ‘need’ them. Video games, DVDs, books, electronic gadgets (guys), that cool looking pair of shoes (ladies), a spontaneous weekend out of town, and so on and so forth. These things won’t usually break your finances as badly as a poorly chosen mortgage or car payment, but they add up, and they add up in a particularly nasty way.

Most of these random expenses end up on your credit card, which is a very, very bad place for them to be. There are two problems with credit cards. First, when you use a credit card you tend to spend more. It hurts more if you have to pull cash out of your pocket to buy something, and once you run out of cash you can’t buy anymore. Credit card purchases are harder to keep track of while you’re making them (Quick, how much have you charged on your card in the last four weeks?) and you can easily charge beyond your ability to pay.

Second, credit cards are designed to keep on paying. The interest rates are brutal and the minimum payment is negligible. If you only pay the minimum it will take you a long time, and a lot of interest payments, before you get that card payed off…if you’re not charging anything on it anymore. If you’re only making the minimum payments and still charging on the card, may God have mercy on your soul, because the credit card company will have none.

I’ll use one of my own bills as an example. A couple months ago my statement showed a $1696.11 balance. That was a bit more than usual because of some Christmas purchases, but not excessively so. That card has an 18.24% interest rate and the minimum payment was $25.

If I only made the minimum payment, I would be charged about $25.40 interest. You can see that it would take a very long time to pay off this balance by making only the minimum payments.

In this case, I paid off the balance immediately, as I nearly always do, and instead of being perpetually in debt, losing another twenty five bucks a month in interest payments, the bank sent me $32.49 for that month.

There is a subtle poison at work with credit cards too. People sometimes begin to think of their available credit as an asset, like a savings account. “I’ve got $2000 left on my card!” It’s not; it’s a measure of how deeply you can get yourself into debt. If the credit card were a lake, think of the credit limit as the depth. How far do you want to sink?

Credit cards can be useful. The ability to spend over what you can actually pay can be useful sometimes in an emergency. You can consolidate many small bills into one big one (rather than writing five checks for groceries, put the groceries on the credit card and write one check). A record of your purchases can be handy. But it is a very dangerous tool that ends up hurting most people. The average American family carries something like $9000 in credit card debt. That works out to about $135 a month just in interest. Over $32,000 in twenty years, assuming the balance stays steady. That’s a very significant drain on anyone’s finances.

There is a very simple way to keep all these expenses under control, though. There’s no need to live like a monk, never spending your money, pinching every penny. Buy the things you want; enjoy yourself. That’s what life is all about. Just do one thing.

Pay off your credit card every month. Never carry a balance into a new billing cycle. If you can do that, you might end up spending more than you should on comic books and porn every month, but the expenses won’t turn into debt that becomes a major burden on your finances.

If you’re clever you will also get a rebate card, which gives you a trickle of cash back to help offset some of your spending. You might also, after having to grit your teeth and write a smacking great check to the bank, decide to rein in your spending a little.

Your credit cards are an enemy that must be slain every month. But if you don’t slay them, they will grow stronger each month and eventually strangle you. Kill them early and often.

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