Debt Free Living in the 21st Century

In 2005, there were over 2 million bankruptcies filed in the U.S., an increase of 30% over 2004.  However, our materialistic society continues to rely more and more on credit to fund their lifestyle.  The average credit card balance continues to climb each year.  The latest statistics show the average household has over $9,000 in credit card debt.  These trends aren’t likely to change any time soon since credit card companies are simply overwhelming most teenagers with credit card offers.

However, the principles of the Word of God teach us to not be conformed to this world.  That applies to many different avenues of life, but it certainly applies to your financial life.  There is no reason for a child of God to be a mere debt statistic.  The apostle Paul even went so far as to say that we should owe no man anything. 

So how do we transform ourselves from the debt-quagmire of this world?  Unfortunately, you can’t just simply walk away from your financial problems.  However, there are some principles that you can live your life by that will allow you to live a life that is debt free!

Cash vs. Credit

Even though we have become a "plastic society", there’s no reason you should have to conform to that mentality. If you are making a purchase of less than $20 or buying something to eat or drink then it’s a good idea to use cash. You will find that you make very different spending decisions when you use cash than if you just whip out a credit card. When buying with credit cards we tend to spend much more than we would have by just paying with cash.  In fact, when McDonald's began allowing customers to use credit cards, their average sale went from $5 to $7.

Credit cards can be a convenient way to pay for larger purchases, but even then they should only be used if you already have the money to completely pay off the credit card statement when you receive it.  Someone who knows how to responsibly use credit cards doesn’t need a dozen of them (the average household has 9).  You really only need one primary credit card and maybe one additional card for emergency use. 

The cost of credit

It’s surprising how few people realize the true cost of credit.  Too many only take notice of the low introductory rates that are headlined on the multiple credit card offers they receive.  Currently, the average credit card interest rate is over 14% and many individuals with credit card balances are paying 20-30%.  Just using the national averages of a 14% interest rate with a $9,000 balance would result in having to pay $1,260 a year in interest just for the privilege of still owing $9,000.  If that individual earns $35,000 a year and takes home roughly 75% of their paycheck, they will have to work a total of 100 hours or two and a half weeks just to earn enough to pay that credit card interest.

A recent report from the Government Accountability Office estimated that about 70 percent of the credit card industry's revenue comes from late fees and other penalties.  These can be as high as $39 (annual fees, over limit fees, late payment fees, cash advance fees, balance transfer fees, etc.) and are piled onto already high credit balances and interest fees.

Just say no

Credit card companies have gotten very smart in the way they solicit you with new credit card offers.  For one thing, they have wealth of data about your spending habits (e.g. where you shop, what you buy, where you go for vacation), so it’s very easy for them to target offers specifically to your interests.  It’s easy to think that you will sign up for a credit card offer just for the “free” gift or incentive and then cancel it.  However, most people never do and that’s why the average household has nine credit cards with an average available balance of $19,000.  Your best course of action is to not accept the solicitations in the first place.  Otherwise, your ability to get credit in the future for the things that you will really want, like a car loan or a home mortgage will be much more difficult due to your multiple credit card accounts and credit inquiries. Even if those accounts have a zero balance or even if you have never used the card, the credit issuer knows that they still represent the availability of credit, and that you could max them out the next day and suddenly be deeply in debt.

Create a budget….and follow it

Think about what you spend your money on and why.  Are you trying to maintain the lifestyle that you had at home, when your parents were paying for your needs and many of your "wants"?  Or are you trying to keep up with your “wealthy” friends or neighbors who are probably trying to live a lifestyle that they can't afford either?

Take the time to create a realistic budget that you can stick to. Many of your monthly expenses are regularly occurring fixed amounts (tithes, mortgage, car payment, etc.).  Make sure you have accounted for all your real "needs" before setting aside funds for your "wants".   

Remember that your budget should also include a savings component.  Too many people fall into the trap of just saving “whatever is left over”.  This often turns out to be zero or even a negative amount if your credit balances are increasing.  However, the prudent man forseeth the evil and prepares both for the future as well as for any unexpected expenses that might come up.

Live within your means

Overspending and living above your means with credit cards by buying things that you "want" but can't afford can be very harmful both to you and to your family.  Young people that start out by engaging in this type of destructive behavior can end up spending the rest of their life suffering the consequences.  For many people, the high credit card balances is only part of the problem.  The more serious issue is the behavior that led to the high balances and sometimes that’s harder to eliminate than the actual balance. 

Learning to live within your income will make it easier to adjust if you encounter hard times (lose your job, health issues, etc.).  Maybe even more importantly it will help keep you in check if you encounter good times. 

Using debt…not abusing it

By paying your credit card balance off on time every month, you basically receive an interest-free monthly loan.  However, if you carry a balance of even $1 you will pay interest on everything that you charge from the moment that you charged it. If you do have a balance on your credit card, resolve to pay it off as quickly as possible and never pay only the minimum payment or less than the actual interest due.

Although you don’t hear much about them, there are people that know how to use credit cards properly.  In fact, almost 40% pay their balance off every month.  Of course, in our perverse society that calls evil good and good evil, these individuals are referred to as “deadbeats”.

If you pay for something with a credit card and don’t immediately pay it off, you can end up paying double or even triple the total cost due to the interest and fees incurred for the benefit of paying with credit.  So before you choose to buy something on credit that you know you won’t be able to pay off immediately, ask yourself if you’re willing to paying double or triple the price you think you’re paying just for the benefit of getting it now. 

The credit card industry has done a good job on getting consumers to focus on their “wants” and not on what they can afford.  Almost all mid-to-high ticket items are discussed in terms of their monthly payment rather than the actual cost.  However, by following the principles of the Bible you can experience a much higher standard of living than you will by being held captive to the credit card industry.