The Wall Street Journal recently reported that US household indebtedness has reached a new high. After years of retrenchment following the 2008 housing collapse it appears that Americans have resumed their love affair with debt. This new peak in indebtedness is being driven by student loans, car loans, and even the evil credit card. Credit card debt topped $1 Trillion for the first time since 2008 and will likely reach a new all-time high this year.
What is so bad about debt, you might ask?
The reality is there are only five uses of money, and what you use in one area, cannot be used for other areas that should be a higher priority. In this way, debt steals people’s financial future.
LIVE: This is the money you spend on lifestyle
What house will you live in, what car will you drive, where will you live, what will you wear, what will you eat, what will you do for entertainment, where will you go on vacations? These are some of the things that fall in this category. For most of us, this is where we would like to see a large portion of our money go so we can have “a good life.” What credit enables us to do is to get these things on other people’s money, but it comes at a price.
GIVE: Charities, family, friends often need our help
Can you provide for your children’s college. Would you like to support kids overseas, or your church? Do your parents need help from a private duty nurse or paying for assisted living? These are just some of the areas we might like to help with, but sadly we often cannot find the means to do so.
GUARD: Health, Life, Auto Insurance, Emergency Fund
Most people who understand financial risk have a large portion of their income going to this area. The cost of a major health issue or a major car wreck, especially involving others, can bankrupt a middle class household. Many who do not allocate funds to this area have experienced financial ruin.
GROW: Investments in self development, entrepreneurial and/or career endeavors and retirement.
This is the area where we expect money to produce a return in the future. Investing in a college education, trade school, or certifications should produce higher levels of income. Money spent to get your own business off the ground should help you attain financial independence. Allocating a percentage of your income to retirement funds can provide for your future in your golden years. Unfortunately, most Americans do very little for retirement and use debt to fund their educations and business start-ups which result in the anchor of indebtedness weighing down their progress.
OWE: Taxes, Debt Service
There is little we can do about taxes unless you do not produce an average income or better. Even then you will have gas taxes, sales taxes, and property taxes eating away at your cash flow. Indebtedness, however is within our control. we make the choice on whether or not to go into debt.
BALANCE IS THE KEY
I have found it useful to take a look at your monthly spend and see how much of your hard earned money is going to each of these areas. No one can tell you what percentages should go where, that is totally up to you. Just remember, what you spend in one, you could spend on another. Are you happy with what the balance looks like in your uses of money? If not, you CAN change the equation.
TAKE THE WHEEL
You can eliminate debt to provide more cash flow to retirement funds. You can buy used cars for cash instead of new cars on leases and free up hundreds of dollars a month to go in your child’s education fund. You can choose to live in a smaller house to be able to travel more. You are in control. Be intentional about the life and future you want to create and start making moves to live your dream.