Credit Card Debt – How Bad is it Really?

Not to turn this into a finance blog or anything, but I felt like talking about credit card debt today.

In my 20s, I always heard people say “You should absolutely make sure you pay off your credit card in full every month!”. I knew that was probably the best case scenario, but I live in reality here and to me, it just wasn’t possible to pay it off. Where would I find an extra $6,000 (which is what I assume my average credit card statement balance was every month)? I told myself the best I can do is pay as much as I can and not let it get out of hand. Besides, I was doing pretty well financially with a fairly good paying job and some of my money invested in real estate, so I didn’t see any urgency in paying them off.

In the end, would it have made much of a difference anyways? I decided I’d run those numbers today.

The assumptions I’m making:
– $6,000 average statement balance (which was never paid in full)
– Interest rate of 18%
– Potential investment rate: 7%
– Period of time: 10 years

So let’s calculate this:
Interest per month: $90
Interest per year: $1,080
Interest over the 10 years: $10,800.

Wow, that’s actually a lot of wasted money. Now let’s assume I had invested whatever money I spent in interest into an investment account that paid 7%. Where would I be?

I’ve calculated it and it would have netted me $15,575. That’s a pretty crazy amount of money.

This money is also ALL interest, meaning, I actually got NOTHING for that $15,575. Maybe it was more of an emergency than I thought.

According to CNN, the average American credit card debt is $15,950.

Using those same calculations, over 15 years, Americans lose over $71,000 because of these credit cards! No wonder so many are struggling financially – they’re giving all their money to the banks.

If I had followed the advice given to me and had found a way to not spend $6,000 unnecessarily and avoid carrying a balance in the first place, I’d have $21,575 in the bank right now. That’s an expensive mistake to make.

Anyhow, I managed to pay off my credit card last year, but this really reinforces for me the fact that I should never carry a balance on my credit card again. Credit card debt is an emergency, and I think it’s time people start seeing it that way.

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Financial Freedom through Minimalism?

“What are you hoping to accomplish with this?”

I’ve had this question asked a couple times already, and to be honest, it was something that I hadn’t put a ton of thought into.

In the end, what this is really about for me is happiness and freedom. We only live once, and really, shouldn’t our optimal life goal be to be as happy as possible?

I see minimalism as a way to achieve this maximum level of happiness. We spend so much time and money* on things that really don’t give us any lasting happiness. If we’re able to shift our focus away from these material possessions and focus on what actually brings us happiness, we’ll find that these things usually really aren’t very expensive. (Spending time with family and friends, going to the park with the dogs, getting exercise in the great outdoors, cook delicious and healthy meals, reading and learning, writing, meditating, and the list goes on.)

By limiting our spending to things that truly make us happy, we should soon find that our lifestyle becomes much more inexpensive to maintain. This opens up a whole set of doors in that it gives us the financial freedom to do what we want to do with your life, whether that’s retiring early** or finding work that we really enjoy regardless of how much it pays.

As much as I love my job, if money wasn’t a concern, I’d gladly take a pay cut to work 20 hours per week so that I could spend more time with my family and focus more time on the things that make me happy.

My wife and I have created a budget that would allow us to live off of her income only and place mine directly into investments. This is step 1 and we hope to cut our expenses down even further as we get better at this.

What would you do if you could permanently cut your living expenses in half? How would your life change?

*the average American credit card debt is currently over $15k. That’s nearly $3,000/yr given away to credit card companies; if that money was instead invested (and got a return of 7%), it would be worth $115,000+ in 20 years. So holding a $15k credit card balance could end up costing the average American $115,000 – no wonder banks and credit card companies are so rich.

**I’ve recently discovered the Mr Money Mustache blog (an excellent blog! I’m currently going post-by-post through it all). He and his wife were both software engineers who managed to retire at 30 so that they could spend more time with their child and do what they enjoy.

Being Grateful

In my last post, I’ve explained my struggles with always chasing that next ‘high’; that next hobby or item that’s going to make me happy.

This has been an issue of mine for years – if not ever. You’re pushed these ideals in advertisements, in movies, and on TV. No matter what you watch, you see beautiful and happy people using these products and making you think that this is what you need. 

We tend to glamorize our lives with these items. When we think of starting up woodworking, we get visions of building beautiful things and impressing people by our handiwork. When we get skis, we imagine ourselves in some gorgeous chalets sitting by the fireplace after a long day of skiing. 

What we don’t think about is the time, money, and effort it takes to achieve those things, and in reality, it never quite lives up to the hype leaving us unsatisfied. So what are we to do? 

Lately, I’ve been reading a lot of Leo Babauta’s blog Zen Habits. I’ve also been reading more about meditation and doing some beginner sessions with Headspace on my phone. 

I really like the idea of focusing on the now and appreciating what we have. We live so much of our lives living in some dream or haze that we miss out on what’s going on at the present moment. We dream about becoming rich and what we would do with all that money, we dream about our next big vacation, we dream about what we’ll be doing this coming weekend or what we’ll be doing tomorrow. We spend countless hours re-living the past. Dwelling on missed opportunities or thinking of how a certain situation could have been handled differently. 

We waste so much of our time living in the past or the future that we don’t take time to fully appreciate the now. 

I can’t speak for everyone, but I’m extremely fortunate to be where I am right now.:

  • I have a beautiful and supportive wife and daughter and two happy dogs
  • We live in a modern townhouse that has more space than we’d ever really need. 
  • I have wonderful friends and family on whom I can trust and with whom I can be myself
  • I can work from home, do a job I love, and get paid well
  • We have the choice of all sorts of quality food and have enough money not to have to worry about whether we’ll be able to afford the bill when we get to the cash. 
  • We also have enough money that we can afford some luxuries like owning a cottage and taking trips if ever we feel like we need to get away. 
  • We’re all very healthy and aren’t hindered by any disabilities or serious illnesses

This is only a short list of the many things I have to be grateful about, but when you don’t intentionally stop to think about it, it’s incredibly easy to take these things for granted and be dissatisfied with them.

If I spend my time dreaming about living in a mansion, having a big cottage with a speed boat, and driving sports cars, it’s incredibly easy to be unsatisfied with my townhouse, little cottage, and Venza.  The reality is that I likely would not be any happier, even if I did have those things. And even if I did, I’d probably be dreaming  of something bigger and better, never really being satisfied and happy with what I’ve got. 

Let me close this post off with a really poignant and relevant video I came across yesterday. 

Aside

Diary Entry

Yesterday, I resolved to try and get up a little earlier every morning. Reading Zen Habits, Leo says that one of the best decisions he’s made was to start getting up earlier. He gets up at 4:30am every morning, but I’m starting small and looking to start waking up consistently at 6:40, and then over time, I’d like to see if I can get into the habit of getting up at 6.

Strangely, I’m not entirely sure what it is I want to do while I’m up so early. For now, being able to have a meditation session and have a nice quiet cup of coffee is enough. I’m thinking that maybe reading, or maybe even writing, could be interesting. Taking the dogs for a walk would likely be another worthwhile activity. Things are so quiet that early in the morning that I’m sure a walk in the park would be very peaceful.

Either way, I just want to get in the habit of getting up early and I’m sure I’ll find something to do (though I’m trying to be somewhat productive and avoid going on Reddit or reading blogs). I know that when I do get up early, I feel better. I’m more awake when I get to work and I don’t feel as rushed in the morning.

Hobby-hopping

It’s been a while since I’ve posted. It’s difficult to get into a habit. I’m especially bad for starting something and not following up. In a sense, I’ve always thought there were positives with being open to trying new things and then letting go when you start to lose excitement.

Looking at it logically, if I get a lot of enjoyment out of starting something new but the enjoyment fades as I continue to do it, would I not get more overall happiness by starting something new than continuing something I don’t enjoy as much anymore?

I don’t know – I’m thinking there’s a factor I’m likely overlooking because I don’t feel like this continuous hopping of one thing to the next is really giving me any real profound happiness. I’m starting to think that perhaps the ‘cheap high’ of starting something new is nothing but that. I do something new, get excited about it, lose interest and become bored. My mind’s always looking for something better; something that I’ll enjoy more. I start something and get disappointed that it’s not as exciting as I expected it to be and then I feel bad that I didn’t follow up.

I also never really get the satisfaction of finishing projects and really developing a skill. Not only that, but it can get expensive.

Take my recent woodworking hobby as an example. I bought myself all sorts of tools and material and spent a good chunk of money setting myself up to do some woodworking. I really enjoyed it for a week. I built myself a workbench and started building a toy chest for Mia, my 8-month-old daughter. I built myself a bench at the cottage and that was supposed to be step 1 of building myself a little outdoor dining area. Now it’s been two months and I’ve barely touched any of it. I have a half-finished toy chest in the garage and tools taking up space (and $600-700 less in my bank account). Every time I walk by it, I feel guilty for not finishing it and feel like I should force myself to do it.

I’ve always prided myself on keeping busy and having many hobbies. Just with sports, in the past 2 years, I’ve played hockey, softball, volleyball (beach and indoor), curling, rock climbing, and squash. I also have an expensive road bike that I take out three times a year. I have a gym membership that I haven’t used in 3 months (though, to be fair, I did go very regularly for about 6 months before that). I bought a set of golf clubs that I bought 4 years ago that I’ve used once in the past two years, I have some 4 year old skis that I haven’t used for two straight winters, and I bought a tennis racket this winter that I’ve only used once all summer.

What is the point of all this? I don’t really know honestly. I do know that having all these things is quite expensive though. All the equipment is also cluttering up my house (well, garage and basement mostly), and I think the worst part is how it’s making me feel bad about myself. Having all these things makes me feel that I owe it to myself to go out and use it all so that I get my money’s worth. Then I feel guilty because I haven’t been using them as much as I feel I should and it drags me down.

So ya, maybe I do get a brief high when I get a purchase. I think that the idea of doing the sport or the hobby excites me more than the actual act of doing it. I think that’s at the root of a lot of my purchases; I keep associating them with some ideal that isn’t realistic. Then I feel bad because my expectations weren’t met and I move onto the next purchase in search of a ‘better life’, never really appreciating what I do have.