Credit Does NOT Equal Cash

Many people confuse credit offered to them by a bank or other lending institution with CASH. 'Woohoo!' they think...'extra money to spend!'

Because credit can feel like it provides breathing room, it is easy to switch unnoticed to thinking it's 'spending room'.

"For many people credit cards aren't real money, at least until the bill arrives," says financial columnist Michelle Singletary in her book Spend Well, Live Rich. She continues, "People think of credit cards as an extension of their income." [This is a good book to help you re-consider your spending patterns. I find the content quite lack-based, however there are many important lessons and eye-openers that make it a very worthwhile read.]

Credit and cash are NOT the same as far as their effect on your wealth, and in fact can be considered opposites. Credit involves more debt, and cash is something that if handled wisely can make you wealthy. Paying for a purchase with cash is the opposite of paying for it with credit. You are essentially agreeing to put not only the purchase amount into someone else's pocket, but all the interest you will pay as well.

I myself used to feel like an extra $2,000 credit was just like cash, and until I understood and changed this dangerous perception, it ruled my financial life and kept me in a difficult situation.

Many times what allows us to believe our purchases are not really affecting our financial bottom line is the fact that it's little numbers: a meal here, a manicure there...how much can it really hurt? The flip side of this coin is how hard it is to hear the answer to that question. We act like ostriches and stick our heads in the sand. We don't WANT to know; it's easier and less painful that way. Somewhere inside we know that we are acting like fools, and it's easier not to face that.
Please know that the day you choose to face your spending habits will be a turning point in your life. This is a GOOD thing. Taking control of your finances is the most empowering, exciting and rewarding activity imaginable. The emotional and financial gains you will enjoy are well worth the sting of humiliation you may feel when looking your choices straight on.

For a little test, and whenever you need a reminder, try the following when you are faced with a buying decision, big or small:

  • Check out the calculators at USATODAY.com and play around. Under the 'saving' list try 'What's it worth to reduce my spending?' to really get an idea what you could do with your money. It can be very inspiring to see how much that little regular purchase could be worth to your financial future if you allocated your money differently.

  • Do a quick mental calculation to determine how many hours of your labor went into creating this much money. For example, if after taxes you pull in $10 per hour and you want to buy a great $100 top on sale for $40 - what a deal! - change your perspective by asking yourself 'is this really worth 4 hours of my working time?' It's no deal. It's $40 that could otherwise be building on itself, in your favor instead of someone else's.

  • For purchases you are considering the use of credit for, ask yourself if you would go into your local bank or credit union and apply for a loan. This tip is courtesy of Michelle Singletary (mentioned above), and it's a brilliantly simple way of getting perspective. Would you really look your loan officer in the face and say 'Well, I really need the $150 for this AWESOME pair of Nike shoes and of course I need socks to go with them...'? Didn't think so.

Remember, credit is NOT your money. It's someone else's money, and you pay dearly for the use of it - sometimes many, many times the original purchase price. Start keeping your money in your pocket, where it belongs, and leave others' money in their pockets. Anyone can do this. YOU can do it.

No comments: