You ever have that feeling you could be doing something better? You pay all your bills on time, but you have a lot of bills. Do you find a large portion of your paycheck is already earmarked for: student loans, car payment, your living room and dining room furniture, a trip to see your parents last month a trip to see your friends for vacation next month?
It is very common to have and continue a leveraged life style that is supported by the ability to easily access debt. Credit card debt, zero percent down auto loans, 3% down home loans, 18 months interest free on the purchase of a new TV, computer, furniture or appliance. The market place and sales professionals are ready for your objection to saying “no, I can’t afford it” by giving you access to credit.
Credit isn’t bad, if anything having access to credit creates enormous economic stability, opportunity and allows people and businesses to manage inconsistent cash flows and major life events. However, having too much debt and perpetuating a constant dependence on debt can be expensive and dangerous. So why do we keep taking on debt? How did we get in this habit? (The answers are far, wide and varied) In my opinion I think like many habits, we develop them and we forget or put off revising our behavior to support our long term goals and wellbeing. We put the emotional comfort/reward of being able to purchase today ahead of the future cost or the opportunity to purchase the service or good at a lower price tomorrow. (Assuming the good or service is cheaper to pay for with cash for vs. financing.)
Lastly, we are bombarded with credit card & financing offers. I must be offered or asked at least once a month if I would like to open a store credit card and receive at least one credit card offer in the mail a month. I’m human, I don’t need another credit card or want one, but I look at them from time to time. Some of the marketing material is very clever, enticing and even financial advisors can get a case of ‘Fear of Missing Out’ (FOMO) from time to time.
Here are four things you can do to reduce your dependence on credit:
1) Over 38% of all households carry some sort of credit card debt.[i] Pay off your outstanding credit card debt and pay off your credit cards every month. The average American family owes $8,377 in credit card debt.[ii] The average American family can save $1,300 per year in interest costs by not carrying a balance on a credit card.[iii]
2) Increase your short term savings. The median American savings account balance is $5,200. The average balance is $33,766.[iv] I recommend having a minimum of three - six months of living expenses plus enough cash to pay the max out of pocket cost if you had a medical emergency in network (typically around $6,000).
3) Create and regularly update a budget to account for future goals, liabilities and needs. Start saving regularly to have funds available to pay cash to cover costs as they arise. (Your car won’t last forever, neither will your dishwasher, roof or cell phone) This may be difficult to estimate at first and will most likely require some homework. Having even a little more knowledge and savings tomorrow could save you from having to finance and figure out large expenses a year or two from now.
4) If you have a budget, no credit card debt / unsecured debt and adequate savings for your short term goals consider opening a brokerage account and investing in a portfolio that can pay for or provide financial flexibility to meet goals in the next 5-10 year goals. I call it a beat the bank account, and have specific investments that are suitable for this time horizon.
In closing developing or executing a savings strategy to lower your dependence on debt will help you break a cycle of depending on debt. Your savings strategy will evolve and change as your life changes. Everyone’s situation is different. It is just as important if not more important to plan for financial goals and needs in the next year and five years as it is for retirement. Make room in your budget to save regularly for those goals. If you are not sure where to start contact your financial professional for additional perspective and ideas.
Kit Lancaster is a Financial Advisor and Certified Financial Planner Professional from Chicago, IL. He enjoys working with young professionals, families and business owners who have a desire to be financially successful and desire courses of action, education and perspective to aid them in accomplishing their financial goals. Kit holds regular educational events in Chicago and online. If you would like to schedule a no obligation consultation or receive more information on his next event please contact him by phone, email or the link below.
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Kit is a Registered Representative and Investment Advisor Representative. trk # 1854720 and dofu 8/2017