Distinguish between wants and needs
Distinguishing between wants and needs depends a great deal on your perspective. The more narrow someone interprets their life, the more likely they are to rationalize some wants as needs. For instance, in high school someone could literally buy status and position by the brand of clothing they wear. In this myopic view teenagers tend to be rather passionate about the brand of jeans they wear (instead of being satisfied with any pair of jeans that covers their behind).

Widening one’s view allows wants to be exposed as wants. Needs hardly need justification to be purchased.

What are needs?
You can’t get through college without seeing Maslow’s Hierarchy of Needs. As you discover what your needs are consider Maslow’s approach. The only things in the diagram that are actual physical (or material) things are on the base of pyramid. The longer someone dwells in the lower level the less likely they are to move to higher levels. From my own life and watching others, the biggest problem comes when we try to fulfill a higher need by ‘purchasing’ it.

When wants become needs.
Consumer debt is a major problem in the United States. This type of debt represents a gluttony of wants justified as needs. One way to curb wants before they become needs is to switch to an all cash lifestyle. As this happens many of the items purchased with consumer debt are never purchased. Saving up to buy big ticket items allows time to make more rational decisions (and give you a chance to shop around).

What do you think?
What have you seen that helps prevent wants becoming needs? Please leave a comment and tell us what you think.

If you have never called your credit card companies you might give it a try. If you have been a good customer with no late payments you’ll have some negotiating power when you call. If you haven’t maxed out your credit card you will get better results as well. When you call tell your credit card company inform them that you’ve been getting offers in the mail with better interest rates. You can also mention that you’re thinking about using a balance transfer card to lower your payments. Ask them what they can do for you in terms of lowering your rate and increasing your credit limit. Lowering your interest rate can help your payback time considerably. A higher credit limit that is not in use will improve your credit score for the next time you call.

Setting up a payoff schedule that works with your budget will have your debts paid off in no time. Don’t shoot for the moon when you set this up. Instead, try something that is doable. The $100 used in this example can change depending on your debt. You want to avoid making the ‘minimum payment’ on each of your cards. Try to be the most aggressive with the highest interest card on the top of the list.

1st phase of payments
A – 14% account – $100
B – 12% account – $100
C – 11% account – $100
D – 9% account – $100
E – 8% account – $100

First order your debts from the highest interest to the lowest. Set up a flat (or consistant) payment you can make on each account every month.

2nd phase of payments
A – Paid off! – Now use this $100 for account B
B – $200
C – $100
D – $100
E – $100

After a set amount of time ‘Account A’ (the first account) will be paid off. Instead of taking that $100 back use it on Account B. You’ve already budgeted for it and it will speed up you payment schedule.

3rd phase of payments
A – Paid off!
B – Paid off!
C – $300
D – $100
E – $100

When you get to Account C you will be putting $300 towards it each month. Continue ‘stacking up’ your entire debt payments on each account until you don’t have any more credit card debt.

Switching to cash is the best way to avoid any credit card traps into the future. It forces you to start saving for large purchases and frees up a lot of wasted money you’d pay in interest. At 22% you’d spend $2,200 a year in interest payments just maintaining $10,000 of debt. Can you image what you could do with an extra $2,200 every year? Switching to cash and paying off your credit cards will help you put this money back in your pocket.

I don’t believe in freezing your cards. If you’ve had real problems with credit cards shred ‘em! Paying off credit cards is very rewarding; psychologically and monetarily.

In Sun Tzu’s Art of War he claims that “All war is deception.” To win in war you must deceive the enemy and sometimes your own troops. Appearing stronger, better equip, and more competent will weaken your enemies morale and increase your own standing. But is this a sustainable, long term strategy? Will this work every time. Unfortunately, no. Sooner or later someone wanting what you have will find the weakness in your armor and exploit that weakness. Trojan horses will only work once, maybe twice, but never more.

The alternative is to be the best, be the strongest, and be real. In personal finance it is much better be rich than to pretend, fake, and deceive others into thinking your rich. Going into debt to appear rich is not the same as saving, investing, and building strong businesses. To the untrained eye those that finance their appearances through debt look so much like those who earn it they can’t distinguish the two. As time grinds forward the fakes are exposed. Someone should tell Sun Tzu that all war is won through superior economics and not deceit on the battlefield.

While monthly interest costs is a simple calculation it is nice to know what your debt is costing each month. Lately I’ve been obsessed with automatic monthly income or expenses. Trying to cut back on every monthly expense and trying to increase monthly residual income is a challenge. What if I paid an extra $1,000 on my credit card? How much would that increase my net monthly income?

While $10 a month doesn’t sound like much savings it all adds up quick. If you have $10,000 in credit card debt you’d be paying $100 a month just in interest fees. Fighting to get back $10 a month in residual income is well worth it.

Cost of $1,000 debt every month

5% APR costs $4.17 per month
6% APR costs $5.00 per month
7% APR costs $5.83 per month
8% APR costs $6.67 per month
9% APR costs $7.50 per month
10% APR costs $8.33 per month
11% APR costs $9.17 per month
12% APR costs $10.00 per month
13% APR costs $10.83 per month
14% APR costs $11.67 per month
15% APR costs $12.50 per month
16% APR costs $13.33 per month
17% APR costs $14.17 per month
18% APR costs $15.00 per month
19% APR costs $15.83 per month
20% APR costs $16.67 per month
21% APR costs $17.50 per month
22% APR costs $18.33 per month

Debt = Risk
The economy for the last 20 years has grown almost entirely on debt. Real wages haven’t increased but consumption has double and tippled. We live in bigger homes, drive newer cars, and have more expensive technology than our parents did. The recent boom in housing has dumped billions of dollars of new home equity and home sales money into the economy. This money was created through new loans and new debt. Consumers have maxed out there credit cards, home equity loans, and are struggling to make ends meet as gas and food prices increase.

Debt is marketed vigorously to young, old, and everyone in between. Debt is sold as the end-all solution for any of life’s problems. Sometimes debt is sold as a tool to ‘leverage’ other people’s money to your own ends. This very popular in the get-rich-quick real estate programs. While there is power in leveraging it can work in the opposite direction, and frequently does. Remember the Great Depression? It was made many times worse by the use of borrowing on margin accounts. Margin accounts are used to borrow from a broker to buy stock. When the market went up everybody made money. When the market started to slide downward everyone panicked. The margin accounts left many people over-leveraged and debt quickly turned against them. The longterm results will disprove the theory of leveraging and using excess debt to build wealth.

No matter which way you slice it debt equals risk. Companies and individuals with a lot of debt are not considered financially healthy. Investors and lenders won’t tolerate the high-risk lifestyle and penalize those companies and individuals with very high lending rates. Debt is a guaranteed loser and those that claim debt as a valuable tool can look at the longterm record of all the failed companies and individuals as proof. Longterm prosperity can’t be built out of excessive debt.

Surely, some debt can be good. It wouldn’t be right to say debt is good, but justified. Debt is justified when these criteria are met: It can consistently make more than the cost of debt. The asset doesn’t depreciate or stagnate. The asset appreciates with time.

(positive growth of asset) – (cost of interest on debt) = Asset(+) or a Liability(-)

Most justified debt include education and homes. Debts that are not justified are: consumer debt, automobiles, and vacations. Those things aren’t bad per say but should be bought with cash, not debt.

If you have consumer debt on credit cards you qualify for this “opportunity”. Your credit debt and interest payments work against any positive interest you might be accruing. Lets say you’re earning 12% a year in the stock market. After taxes you’re only getting 9% unless you’re protected by a ROTH IRA. A 9% return is the average stock market return over thirty years (minus taxes). If you have an equal amount of money in consumer credit card debt and your paying 18% a year in payments you are still down. You are actually losing -9% a year with your current investment strategy.

Risk is a considerable factor as well. If the market is down you could be earning nothing or have negative returns in the short term. This would decrease your -9% to -18% in a hurry. If you tack on inflation you’re investment strategy is negative over -20 percent!

Paying off credit cards isn’t very exciting. It doesn’t feel the same as making new money. When you add up all the positive returns you are making and subtract your negative interest it only makes sense to stop the bleeding. Once you’ve got your debt under control start making positive investments.

You might consider different debt consolidation options, selling stuff, or drive a different car. All of which will help you in your investment goals.