Personal Financial Tip 4

Credit cards are powerful financial tools. They allow us the freedom to make purchases today and pay for them over time. They eliminate the need to carry large sums of cash around. They provide a great convenience that we’ve all grown dependent on.

We are all aware of how easy it is to accumulate large balances on our cards. We try, with varying degrees of success, to resist the temptation to purchase things we don’t really need. We hope that through this exercise in self-control we can keep our credit card balances from growing any larger than absolutely necessary.

No matter how successful we are in controlling our spending, our credit card balances will still creep up if we’re not careful. This stems from the fact we rarely purchase anything with cash anymore, we use our credit cards. It’s not practical to carry around enough cash for our day-to-day purchases. In today’s society the simple actions of filling up your gas tank and picking up groceries will require you to have over $100.00 in cash. It is more convenient, as well as safer, to charge the purchases and then pay the credit card bill at the end of the month.

There is a problem in addressing your personal expenditures this way. If you left home yesterday with $100.00 in your pocket and bought a tank of gas for $50.00 you now have $50.00 to spend at the grocery store. You are limited to what you can buy with that $50.00. Today you are planning to do the same thing. Leave the house with $100.00 buy gas and groceries. You stop to buy gas and that same tank of gas now costs you $55.00, leaving you with only $45.00 to spend on groceries. You start with $100.00, you have no control over the price of gas and since you can’t print up money at will you are now forced to spend less on groceries.

Living day-to-day on cash forces you to reduce your spending habits immediately in response to inflationary pressure on the cost of your previous purchases. By using credit cards for these purchases you typically will not modify your spending habits but end up having charged more at the end of the day. This results in a slow yet steady increase in the outstanding credit card balances that can easily go unnoticed.

Until recently we’ve been living in an economic period of little or no inflation. Increases to our monthly expenses were primarily due to lifestyle decisions. We bought a new car and now have a car payment to make or we added a movie channel to our cable package and now have a higher cable bill. We spent more because we consumed more.

Today we are faced with a new reality. We are forced to spend more every month because everything costs more. In order to maintain the same level of living, we need to earn more money or be forced to borrow more money. Few of us have the ability to make more money so if we don’t want to go deeper into debt we now must adjust to living with less.

In today’s financial environment we now need to think about any major purchase. We want to prevent ourselves from living off of tomorrow’s income, today. Income committed to paying interest charges cannot be spent to buy anything else. This is only a first step. We need to watch all our minor purchases as well, to make sure we’re not unknowingly taking on additional debt.

Addressing your personal financial needs is a job. If it’s not taken seriously, trouble awaits.