Be an interest receiver, not an interest payer. In the text we covered the concept of compound interest; over time it will amass a fortune. Interest compounding is what makes lenders so profitable. Credit card companies in particular, at rates of 15–20% or more, can essentially extract the financial hopes and dreams of their customers in exchange for the immediate gratification of an unwise purchase.
Do not buy anything with a credit card that you cannot afford to pay off entirely when the bill arrives. Think of this: there are people out there who are still making payments on a pizza they ate years ago. If you allow a credit card balance to go unpaid, you are making the power of compound interest work against you instead of for you. Therefore, keep your lifestyle adjusted so that your spending is below your income, sufficient to keep all consumer purchases paid this month. It is much less difficult to delay a purchase temporarily today than to suffer the financial consequences of an unwise, premature purchase over the long term.
I hate it when an author keeps repeating himself, but I can’t apologize for repeating this particular point. It simply has too important an impact on your life. My colleague Jon Rehurek is writing a book on stewardship, and he has a list of “non-negotiables” when it comes to credit card use:
1. Only purchase items that you already have the money to pay for within your budget. Avoid purchasing impulse items on credit, even though this can be challenging.
2. Pay off the balance entirely every month prior to your payment due date (i.e., never pay just the minimum payment and never carry a balance).
3. Never incur interest.
4. Don’t spend any more than you would spend if using cash or debit cards.
Studies show that most people tend to spend more when using a credit card then when using cash or a debit card. If you find yourself doing this—and most likely you will spend more when using a credit card—stop using credit cards.
For the typical person, it is more difficult to make a purchase if he or she knows that the money is coming out of his or her checking account directly and immediately versus the credit mentality that says, “I can pay this off later.”
Because many financial counselors hold the view that there is no such thing as “responsible credit card use,” these principles are recommended only for those with iron-clad discipline. All others should perform “plastic surgery” on their credit cards and cut them up.
Now, I realize that some reading this book, being previously unaware of these disciplines, may find themselves carrying a balance on one or more credit cards and unable to pay them off. For you, financial independence is going to require a more significant adjustment to your lifestyle. First, you’ll need to make an adjustment to reign in your spending to fit within (actually, below) your income.
Second, you’ll have to limit your lifestyle further to pay for your earlier purchases and the accompanying interest. When you take the Compass course at your church, you will learn how to “snowball” your credit card balances by concentrating larger monthly payments on one account at a time (while also servicing other debts) to knock down one account after the other. To get a head start, go to the Compass Snowball Debt Calculator:
Use the Snowball Debt Calculator
Or you can visit Sean Freiburg’s Unbury loan calculator:
You can experiment here with different scenarios to see your potential interest savings.
Regarding other forms of consumer debt: if possible, wait to purchase your first car until you can do it with cash. Easier said than done, I realize; perhaps you need a car to get you to your job. If you must finance that first car, buy a sensible used car, not a new one. Make the largest down payment possible and finance it for the shortest possible time. Once paid off, keep the car and keep making those payments, not to the lender but into your savings account. Eventually, you’ll be able to buy all of your cars with cash.
Now the tough one: your home. Few people ever get to the point where they own their home debt-free, but it is possible. Here too, be sensible when buying your first home, and when you can afford to do so, make larger payments on your mortgage than required. That entire extra amount applies fully to principal and can significantly reduce the time it takes to pay it off.