Friday, December 18, 2009

How We Think About Money : Part 1

Today I canceled a credit card. It was as if the heavens opened, and a dove descended from the sky.... and voice boomed "Well done, my good and faithful servant!" Canceling a credit card has got to be one of the best feelings ever.

This particular card was the first US credit card I was ever accepted for, 4 years ago or so. I had originally opened it to build credit here in the U.S., and it carried a limit of on $500, so I figured there was only a limited amount of damage I could do with it. Haha. Well, of course, over the course of the following few years I maxed it out more than once. It did serve its purpose, however, as it helped get my credit to a point where I bought a house last year.... Which was one of the ultimate goals of this whole credit-building endeavor.

Since then, though, my thinking on a few things has changed. I read a book (and then several more) by an author named Dave Ramsey.... and he fundamentally changed the way I think about money, relationships, debt, credit, and so many other things.

For instance, with the cancelation of this credit card today... I did something that flies in the face of conventional wisdom. You see, credit reporting bureaus look at several things to determine your credit score. They look at how much debt you have, how much available credit you have... Basically the difference between your balance and your limit on credit cards, lines of credit, etc... They ALSO look at the length of time you've had those relationships in place. So, by canceling my Capital One credit card today, I've basically severed my longest lasting credit relationship, and that will likely affect my credit rating negatively.

Now, here's the thing. That doesn't bother me one bit.... and I'll explain that with a question...

Why do we have such a reverence for the almighty credit score?

Why is it that we fuss over this little number held by three companies that we don't even have any direct relationship with? Why are we willing to GO INTO DEBT in order to improve this number, by opening credit cards and financing purchases? It's because a good credit rating gives you access to things you wouldn't have access to with a poor rating, right? .... And what is the primary thing a good rating gives you access to? Borrowing money!

So wait.... let's get this straight. We're encouraged to open credit cards and accumulate some "manageable debt" as young as possible, in order to establish a good credit history, so we can borrow MORE money when we're older? Tell me that isn't the plan!

There has got to be a better way to live!

..... and I really do believe there is. Since this fundamental shift in my thinking about money, Jess and I have really buckled down and gotten in control of our financial situation. We made a monthly budget, and use cash in envelopes to set physical money aside for each area (groceries, gas, fun, clothing, etc...)... We've also started aggressively paying off debt, and developed an emergency fund. Essentially, we started paying closer attention to our spending, and started planning our our spending instead of just swiping the card whenever we need (or want) something.

The basic idea behind Dave Ramsey's thinking is this: Take aggressive control of your financial situation, and sacrifice NOW in every possible area of life, in order to secure financial peace for your future.

The truth is that many of the things we spend our money on are NOT things we need, or need immediately. Avoiding debt this aggressively means we can't have everything we want as soon as we want it, but ultimately I believe it leads to a less stressful and captivating lifestyle.

Now, I realize houses aren't exactly easy to buy in cash, and that is one exception that Dave Ramsey talks about, although he's a big proponent of putting 20% down, and doing a 15 year fixed term... but that's another blog!

There is so much more to think and talk about with regards to this whole subject, and I will likely write another blog at a later date that continues many of these thoughts (hence the "Part 1" in the title).

I'm interested in your thoughts on the issue!

Also check out daveramsey.com for more information on financial peace and living debt free!

Jonathan

7 comments:

Ida said...

Credit Cards are dangerous... Debit Cards I heard are so called better and safer.....

Kacie J.L. said...

I think Credit cards are crazy and i was tlking to a friend about it awhile ago cus Im 18 and he said i neeeded to build my credit and im like what im not going into dedt. He told me its helpful to get one with lowintrest (is that what its called idk) and use it once on something really cheap and hide it or put it way and never use it again. Honestly i think credit cards are something the Gov developed to get ppl into trouble and Im hesitent about getting one for myself. (I mean yea i need a job first and money first) but stil its kind of scary (and im gonna stop now before i write a whole book lol)

Leif Skartland said...

Being debt free is the best feeling in the world! It's crazy how when you tell your money what to do rather than the other way around, it feels like you got a raise.

Jessealmanza said...

I find it especialy hard to build credit as a young adult. The fact that in order to recieve a loan you need some form of credit and alot of times a cosigner is needed. Just trips me out that u need to use someone elses credit to start a credit relationship of your own

Anonymous said...

Be careful with that credit score - it affects your car insurance premiums, property insurance premiums, any rentals you might want to partake of, mortgage rates, even jobs, as employers often check credit scores. Ramsey ignorantly assumes that people must go in to debt to build a credit score. This is not true. If you use a credit card, pay it off each month. You're building a credit score without going in to one penny of debt. Ramsey has no problem with people paying more for insurance, etc, possibly missing out on a job opportunity, by adhering to his little set of simpleton financial 'rules'. Think it through - Ramsey's advice is only advantageous to those who have no financial savy at all, and is useless for those who are in a stable financial situation and in a position to start building wealth. I wouldn't have been able to build the wealth I have today if I'd listened to his advice.

Jonathan said...

Anonymous -

Good thoughts.... some of which i partially agree with. in other areas I think you're missing the point.

Firstly, I still have 1 credit card which I've had for quite some time, and I decided to keep it open for the very reasons you described... I just didn't want to have multiple credit cards open when I don't need or want them. I've got a long credit history with my bank, my mortgage is always current, my bills are always paid, and I've never missed a payment on anything. I'm sure my credit will be just fine... it's not that I'm looking to destroy it - I'm just choosing to live a lifestyle that isn't dependent on it.

Secondly, you say you wouldn't have accumulated the wealth that you have if you had followed dave ramsey's plan.... well good for you, you have money! That's not the primary goal of these financial plans. These plans are designed to create financial peace and security, not just wealth. These goals involve nurturing marriages and families, it's about more than wealth! There is absolutely nothing wrong with having money, in fact, these plans help you accumulate savings and set you up to have much more money in the future... but the ultimate goal is financial peace.

Thirdly, I am one of so many North Americans that got myself into a good deal of debt when I was younger. I discovered firsthand how EASY it was. It took me years to dig myself out of the hole i dug myself in my first few "adult" years. After all that, I made a choice never to put myself in that position again. These debt-avoidance plans have given me a freedom in life that I wouldn't have had if i had just stuck to the status quo, financed everything i wanted, and accepted a debt-laden lifestyle as the norm.

I'm not interested in simply doing whatever I can to accumulate wealth. That's not my aim, nor is it the aim of these types of programs. It's not about accumulating money, it's about living in such a way that you're no longer consumed by it.

I want to cultivate a debt-free lifestyle because I do not want to be a slave to money and debt. You do not need to make $250k a year to do this. Wealth is great - living a lifestyle of financial peace is even better... and many wealthy people do not live in financial peace!

You're right about one thing though - These plans are designed for people who need help with money... people who are unorganized or undisciplined with their money. However, you seem to think that this fact makes these plans irrelevant. On the contrary, I think the majority of Americans fall into this category. I know I did!

So I would ask....What's wrong with encouraging people to take charge of their financial situation, and free themselves by aggressively eliminating debt?

Thanks for your thoughts -

Jonathan

Anonymous said...

Dave Ramsey...good move! He's a great guy!! My family and I frequently watch his television show! He's got some GREAT advice!