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Are You Stealing From Your Future Self – Financial Independence

Financial Independence - Money and Finances

Financial Independence

Over at It’s Your Money, there is a great post responding to advice from financial advisor Suze Orman regarding the use of credit cards by the young generation.

Suze’s advice:

My credit card strategy is solely for expenses that you need to live on — and not expenses that finance your living the high life. The only YF&Bers who should try this are those of you who are conscientiously doing everything you can to get your living costs as low as possible but are still coming up a few hundred dollars short each month. …

Because I want this strategy to be nothing but a lifesaver, we need to laydown some basic parameters. While you are starting out in your career, I think it is perfectly reasonable to lean on your card for monthly living expenses, but you are to keep those charges to less than 1 percent of your annual gross income. For example, if you make $30,000, I don’t want you to use your card for more than $300 in monthly living expenses.

After two years, that would mean you have charged $7,200 on your credit cards. That’s the upper limit of what I think is “safe” for you to take on, given your current earnings. My thinking is that within a few years, your career should be picking up some steam, and you can stop adding to your card debt. Ideally, at that point you would be able to start paying down the balance. …

Michael’s response:

Okay, I get the picture:

Entry-Level Job + High Cost-of-Living Area = Credit Cards Are Necessity

True as that might be, I still have misgivings about the advice. Reality tells me that there may indeed be times when Suze’s YF&Bers have absolutely no choice but to lean on plastic. But where is the line drawn?

“It’s okay. Suze says I can use plastic until I have the perfect job lined up. Once I’m making big bucks, I can pay all this stuff off.”

Seems like a pretty tenuous line of advice to balance upon, if you ask me.

I would go one further and say this is a crock. I have personal experience with this: I graduated in 2003. As my wife and I had a certain lifestyle going into school that we enjoyed thanks to being a dual income family with no children (not particularly high incomes but you get the picture).

As my education went along I had to change jobs from time to time, and eventually my wife became pregnant and stopped working when we had our first child. During the course of my education we also bought several big items, upgraded to a 1997 Ford Taurus, and stuck to relatively roomy accommodations.

The bottom line is that it hurt our bottom line. I used Orman’s logic and decided to use credit cards and a line of credit to fill the gap between my/our income and our expenses. I played paintball quite regularly on my credit card, and we would do things like upgrade our old 19″ cabinet TV to a newer 25″ TV (bought it to help a friend get cash, paid $500).

We could have lived within our means, as I saw some of my friends do: they relied on public transportation, they lived in apartment blocks, did not own many DVDs, if any. They had few toys for their kids (kids really don’t need that many toys). They worked hard during school and still managed to have a parent raise the kids because the wife would work at home.

Financial Independence

My single friends would live with four or five other students to save on rent and utilities and would work extensively. They either used public transportation or drove cheap cars.

I personally do not believe that many people actually live in Orman’s scenario of being unable to live within their means, I just think they have too much pride to drop their standard of living and live on Mac and Cheese instead of the occasional pizza.

Instead I think most students, like myself, rob their future selves by spending on credit cards while in school. If I had been smarter and not spent on credit cards and lines of credit while going through school, I would have a lot more free cash today. All in all, I would have nearly $1000 in extra cash per month today if I had lived tighter in school. The me of 6 years ago has taken money from the me of today.

Now in my case Orman was right: I did get a good paying job, and I can carry the costs of my in-school spending, but man do I wish I could spend more of the money I am making rather than paying off my old debts. What if I had been like some of my classmates and hadn’t found a solid job? I imagine I would find myself defaulting on my debts and facing bankruptcy as a recent graduate. What a great way to start life in the real world!

My advice to students would be to not take Suze Orman’s advice. If you don’t think you can live within your means, try lowering your standards, ditching the car, not eating out, buying no DVDs, CDs, or games. Room with others, and buy used textbooks and goods. If all of that truly does live you still needing more than you earn, try to earn more.

If that does not work, you should not be looking at credit cards. Get a student loan, from the government if you can. If it is not enough, appeal for more. If that does not work, go to a bank. Banks often offer student loans that have excellent terms, often offering interest below prime and requiring only interest payments until you are out of school (TD Canada Trust student lines of credit actually give you until one year out of school before you have to start making principal plus interest payments). You may need a cosigner but it is still a better idea than a credit card.

If someone is not in school yet it would be a really good idea to start early to save for an education. Even if they can’t save the full cost of their education, they may be able to save enough to support themselves comfortably.

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