By not incurring any.
Fine, 4 words probably don’t constitute a regulation blog post. But there’s got to be something we can do to distinguish ourselves from (and discourage you from following the examples of) the galaxy of personal finance bloggers who do nothing but chronicle their debt. (“One woman’s journey/one man’s journey/one couple’s journey/one family’s journey from debt to freedom.” And it’s always a “journey”, which is as close as most of these people are ever going to get to a vacation. Or at least a vacation that they didn’t finance with a credit card and spend 20 years paying off.
The old saw is that an ounce of prevention is worth a pound of cure, but our calculations show that 16:1 isn’t anywhere near the size of the ratio between the benefits that accrue from the prevention of paying your freaking bills on time and the cure of minimum monthly payments, bankruptcy, or burying one’s head in the sand.
Like most people of our vintage, your bloggers first got credit cards when we were in college. (It was our parents who grew up in an era when credit was something consumers sought out, rather than the other way around.) Come to think of it, American Express didn’t even seem all that concerned about whether we’d reached the age of majority.
(Note: It’s amazing that today you can, for instance, overhear a person offhandedly give their name or even their phone number to someone, then use your mobile device to find out where that person lives, where she works, how many kids she has and what her friends’ and pets’ names are.
But in the pre-Internet Age, what you could conceal was every bit as impressive as what you can uncover today. You could get a speeding ticket in one jurisdiction and never have any court on the other side of the continent find out about it. You could avoid people for days on end, and blame it on having a landline only and no answering machine. And you could lie about your age and get a credit card with very few questions asked, if any.)
That original Royal Bank VISA card is long gone, but fondly remembered as the most significant totem of the entry into adulthood. Certainly more than a driver’s license. They give those to adolescents.
The first items bought with that card included…groceries. And little else beyond that. Using the card was more of a challenge than anything else: Is it possible to swipe plastic in place of cash whenever possible, and not scream in horror when the statement arrives?
You know how kids are better at picking up languages than adults are? Maybe this is a similar phenomenon, because there isn’t an 8-year-old in the world who thinks about financing purchases of candy and Pokemon stickers.* But adults will rationalize their revolving balances with whatever excuse you give them. “It’s the holidays, I’m not Scrooge.” “It’s only $15 a month, it’s not like I can’t afford it,” etc.
If you can’t pay cash for it, you can’t afford it.
Who doesn’t love a blanket statement like that? The implied second half of the proverb is that it refers only to consumer goods. Basically, anything where 14.99% annual interest is impossible to justify.
No one expects you to pay cash for a house: the opportunity cost is too great. Why spend a decade or longer saving up for the price of a house when you can borrow the money, at significantly less interest than credit cards levy, while simultaneously not having to pay rent? If you’ve got the down payment available and the credit history (see above), it makes perfect sense.
You shouldn’t have to pay out-of-pocket for a hostile takeover of a plastics manufacturer, either. Just put up $15 million or so of your own money and borrow the remaining $850 million. The company itself is an asset by our definition, in that it’ll generate income under the right conditions.
But the purchases that result in people snowing themselves under with credit card debt are usually moronic and wasteful. Yes, we understand that you want to impress your new love interest by eating at that Mobil 2-star seafood place instead of Red Lobster. And that $150 for two (including varietal house wine per the maître’d’s recommendation) is going to get you somewhat closer to sex or a more intense if equally superficial level of companionship. But there’s still the business of the monthly statement. And our research has shown that balances are a lot easier to pay when they’re smaller.
Decades later, with more income, we’ve adopted the curious habit of not living like college kids. We have real furniture, for one thing. And trucks, with thirsty gas tanks. We even have satellite radio subscriptions, tool kits and health insurance, all of which goes on the credit card. And you know what? We still pay it off in full every month. It’s the craziest thing. It’s almost like we read the cardholder agreement, saw what we’d be in for if we didn’t make our payments on time, and decided to act responsibly.
Once again: Doing smart things is important if you want to build wealth. Avoiding stupid things is at least as important.
COMING NEXT WEDNESDAY: How We Paid Off $0 in Student Loans.
*Is Pokemon still a thing? Or did it die out 14 years ago? How about Beanie Babies? Ah, the pleasures of being childless and not having to stay on top of juvenile consumer trends.