Living within our means

29 09 2008

(Note: I started writing this before I heard about the economic bailout failing the House vote, I’ll write about that separately shortly)

I’m still stuck on the whole economic situation. I watched the debate on Friday and it didn’t impress me enough to bother writing about it. My one sentence response to the debate is this: They said a whole lot without really saying anything. It’s just not worth a whole post to break that down.

I’ve been thinking a lot about how this economic downturn (or if you’re in the media and you want to scare everyone, we can call it a CRISIS or a CRASH!) will effect the way we act as regular, everyday citizens. The way I see it, it’s going to be a major adjustment in lifestyle for a lot of people, especially those that are in my generation (the 20-30 year olds).

Most of the problems that we’ve been running to are due to the illusion of wealth that we’ve created for ourselves. I’m a part of this. I own a 37” LCD Hi-Def TV, an $800 camera, a $1600 laptop, well over a thousand dollars in video game hardware and software, I go on trips that I can’t afford…. I could go on. I’m a teacher so I certainly don’t make the money necessary to make these kinds of purchases like I have. I use my credit and pay it off over time. This is the illusion of wealth.

For the last few decades, we’ve been living backwards. Instead of saving to buy that TV, we’re buying that TV and then paying for it (with interest) over time. Instead of putting 20% down on a home and having good credit, we’re maxing out credit cards and putting nothing down on a home we can’t afford.

The federal government is no different. Prior to the 1930s, our monetary system adhered to the gold standard. What this meant was that, at any time, you could exchange $20.67 in US dollars for one ounce of gold. This was important for a couple of reasons. First, it meant that people had confidence in their money. They knew that they’d be able to use its purchasing power later. That’s because gold is a valuable commodity anywhere, so if the dollar were to be devalued, you could exchange it for something of value and still have purchasing power. The second reason that the gold standard was useful was that it stopped the government from printing new money and running up a deficit. In essence, the bailouts that we’re seeing now and the entire war in Iraq (plus more on top of that) are funded by money that we don’t have. But since the government prints the money, it can just either print new money or just borrow some from a foreign country. On the gold standard, the government could only print money if they acquired enough gold (aka they could print a $20 bill for every 1 oz of gold that they had on hand… no gold, no printing). After we dropped this standard, the government has been running up its credit the same way that a lot of Americans are right now.

This economic downturn is the market (which I really think is a living creature) telling us that we (both the government and its people) need to stop. We need to stop buying on credit except in real emergencies or to buy a house or car that we know we can afford to pay for comfortably over time. If we want something nice like a new TV or a nice trip, we need to plan in advance and save for it. It’s not going to be easy to do this, especially for my generation. We’ve been raised in an era of loose credit where doing this was ok. I liken it to the problems that we see with peoples’ diets. Many people try to lose weight but can’t because it’s so difficult to change the things we eat and drink. We’ve been eating and drink those things are entire lives. I found out that the only way to truly lose weight and keep it off is to change your whole perspective on eating. You have to change your lifestyle. You need to stop fooling yourself into thinking that you can keep eating whatever you want and there aren’t going to be consequences. Only after you are at peace with this idea can you really begin to change your lifestyle and head down the path that you want. Credit addiction is no different.

In addition to the major purchases that I already talked about, I used to use my credit cards for almost everything. It was as much a convenience thing as it was that I wanted stuff, but it created a false sense of wealth for me. I had a $3000 limit and I always thought that I’d just buy now and pay for it out of my next paycheck when my credit card bill game in.  The only problem was that I said that about too many things and I couldn’t cover the whole balance.   I’ve been starting to ween myself off of using credit cards. It’s tough when you have very little in your savings accounts to pay for things instead of relying on credit. You still need to be able to operate on a day to day basis. You still need to be able to buy food, groceries, and happy hour beer (I swear, it’s a necessity), so in the short term, you will have to rely on your credit to stay afloat. The goal is that you use your credit less and transfer the savings into paying down your debt.

The way that I’ve been handling it is to purchase everything on my debit card. I know, roughly, how much money I have in my bank account. (use Quicken or Microsoft Money to track your finances) All the small purchases, like a sandwich or a coffee never end up on my credit card. That really adds up. Also, I have to be a little thriftier with my spending because I don’t want to empty my bank account. It’s caused me to second guess a purchase when I’m in the store. I only rely on my credit cards right before my next paycheck to have that small bridge, if I need it.

I’ve found that I’m saving a little more money each month and my credit cards are going towards zero. It’s definitely not a short process to make this adjustment. You can’t, as they say, quit cold turkey. I’ve been doing this for about 6 weeks and I don’t know if I’m halfway to my goal yet.  The idea is that you will slowly remove your dependence on credit and live a savings and cash life style. You have to plan in advance if you want to go on a trip and save a little extra money each month. You might have to join the Christmas club at your bank, but in the end, you’ll be living a lifestyle that suits your income and your means and you’ll removing the stress that debt can place on a person.

I don’t think that I’ll cut my credit cards in half when I pay them down to zero, but my perspective has definitely changed. I’m much more willing to shun off things that I think I need because I don’t want to use my credit card. I don’t have the cash, it can wait a month.

I’m willing to bet that in 5 to 10 years, this will be the default perspective once again.

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