Saturday, August 26, 2017

Why Most People Will Never Be Financially Free

I was at the mall the other day, and there were two teenage girls in front of me at the cash register waiting to see if they get approved for a store credit card. As the cashier was checking to see if they were approved one of the girls started praying hoping that it will help get the credit card.

And when they found out they were approved?

The number one reason why most people will never become financially independent, or free, is because most people take on too much debt that they cannot afford.

The average American household has $15,572 of credit card debt. Why is that so bad? Because if you buy a new sofa for $3000 on your credit card with 15% APR, and you only make your $60 minimum payment. That $3000 sofa will end up costing you $6641 and it will take you 16 years to pay it off. 

The majority says you don’t need to worry about debt as long as you can make the payments. But if you’re the minority, it’s nearly impossible to build wealth if you are always playing catch up with your bills. And contrary to what most people think more money isn’t going to solve the problem. That’s just like pulling the top off of a weed while leaving the root. You have to get to the root if you want the weed to stop growing. Fixing too much debt starts with disciple and knowledge.

Going back to the original $3000 sofa. If you paid the minimum $60/month, $36 of the $60 is used to pay interest. Meaning 60% of every dollar is you pay is going to the banks’s pocket because you used their money and only 40% is going to pay off the sofa 

I’m going to tell you a little secret. When banks give you credit cards, they don’t do it to help see you succeed. They do it because you will continue to buy things you can’t afford so you’ll continue to make them rich your whole life. If you really think they were giving you credit out of the kindness of their heart, ask them to give you a lower interest rate. And see what they say.

That might be why In 2015, banks spent over 16 billion dollars on lobbying alone, so they can keep promoting debt in a beautiful and magical way. 

So here is what you should do. Only take a credit card if you can set up an automated payment of the full balance of your credit card. That means every month, you should start with a 0 balance on your credit card, because the money was automatically taken out of your bank. If you can’t afford the full payment or don’t want to, you shouldn’t take a credit card period, buy with cash. You can’t afford otherwise.

Now I understand there are some businesses like the real estate development business that run off of debt. But right now I’m talking about personal finances. There are very, very few times where I think taking on debt is okay, because debt is usually just a tool to help us buy things we can’t afford. 

I get this is hard for most of us to hear because most of us are grown up so accustomed to credit cards and debt. It takes a lot of disciple to live below your means, get made fun of for having beat up stuff, and have delayed gratification. 

But you’ll sleep a lot better when you have no mortgage, no car payment, and no credit card bills and you can allocate your money to make to make you more money, rather than make a banker richer.
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