by Admin
20. August 2010 19:56
Regardless of whether it is a major or a minor life situation, most people tend to find excuses or try to put the blame on someone for the precarious situation they find themselves in. If there is nothing or no one to blame then it is "my bad luck." The moot point is that we all tend to evade responsibility for adversity.
It is no different in the case of running up a huge unmanageable debt. The most common scapegoat in that case is that piece of plastic that you carry in your wallet.
Despite the convenience that plastic money offers, the buy-now-pay-later culture associated with it has created more problems than it solves. Add to that the undue importance that we ascribe to material possessions and we have a major problem at hand.
Does the fault really lie elsewhere or should we be doing some introspection? The answer lies in the never ending tussle between what we desire and what we deserve. There is no end to desire because the moment a new toy arrives in the market we think we deserve it. Affordability is somehow relegated to the back bench: the desire rules supreme.
Financial independence requires discipline. No matter what the credit card companies say or how attractive the terms of a home or personal loan are, what matters the most is the state of your current finances and your intelligent evaluation of future prospects. It pays to think twice before you offer your credit card for swiping or sign a loan agreement.
Let us have a brief look at why and how we are compelled to spend more than we should.
The Psychology of Debt
- Internal Factors
It is psychology at work. Most of what we buy is basically meant for creating an impression on others and one of the primary factors behind running up a debt is the basic human trait of trying to justify even inappropriate actions, in this case extravagant purchases.
Perhaps a bigger culprit is the society that still values a person on the basis of appearance and possessions instead of moral values. Somehow or the other, that has led to a situation where the human brain has been hardwired to "keep up with the Joneses." Regardless of the difference between incomes we tend to want things of greater value than our neighbors.
The next in line are people who try to justify expenditure under the mistaken belief that they will somehow manage to pay their credit card bills in future. You have just been handed an appointment letter or are about to graduate; the very thought of landing a good job is enough for many to go on a spending spree and make irresponsible purchases. The reality dawns when the entry level job fails to finance the lifestyle that you were dreaming about.
- External Factors
While these are intrinsic factors, there are also extrinsic factors at work that compel us to spend. Banks and other lending institutions including credit card companies have a stake in our spending habits. Their income source is not only the interest that we pay but also the commission that they get from merchants. They profit from the fact that convenience will compel us to spend more than we can afford. And for that they play on human psychology.
The credit card companies make sure that a big ticket purchase appears smaller than it actually is. They have a perfect trap laid out in the form of minimum payments. What is the USP used by credit card companies? "Why wait for something that you can buy right now." And "right now" is highlighted because they know this is something that plays the most on human psychology. Who wants to wait to earn and save? And consumers do fall into the trap when they fail to look at the bigger picture and focus only on the minimum payment.
There are many people who make timely payments and avoid paying interest or late payment charges. Credit card companies have another trap ready for such people in the form of enhancement of credit card limits. They want you to feel richer with, say, a $50,000 credit line and hope that someday you may bite the bait.
The less said about other lending companies, particularly home loan providers, the better. They come up with innovative products. One such product is interest-only mortgage where you only pay the lender a fee for providing the loan and the principal amount. The lender is basically compelling you to take a gamble while its own investment is 100% secured.
The Psychology of Money
If you want to keep out of debt, you need to understand the psychology of money. Once you have your finger on the pulse, the pulse of how to act with your money, you can get out of unhealthy spending habits. The primary thing is to realize that money is a means of buying comfort, not stress.
To keep out of debt you need to take a good look at what money means to you. The biggest mistake that we make is to correlate spending with income. It should actually be correlated with an opportunity to be comfortable. You earn to keep yourself out of stress and not to invite stress.
It can be argued that risks and rewards are two sides of the same coin. While that is true to a great extent, it is not the full story. Risk can never take precedence over stability. Staying out of debt necessitates striking a balance between the two.
The Bottom Line
While we may want to blame the media, the lending companies or an increasingly greedy society for our unmanageable debt, it is basically nobody's but our own fault. We should be wise enough to know where to draw the line, the line between what we desire, what we deserve and how much of it we can afford.
Let us all get wise and first develop the ability to spend wisely and save. Instead of investing in cars or unproductive electronic gadgets or spending in wasteful hotel stays, invest in assets that appreciate in value. The time to spend on expensive toys will come automatically when we our savings grow.
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