In my last article titled The First Secret to Paying Off Debt, I spoke about how we as a society are encouraged, from early on, to start amassing debt. You watch any ad on TV, you watch anything with our parents, and we see ourselves being able to use some form of payment, other than cash.
Go to the grocery store – get out your credit card. Go to the gas station – take out your credit card. Pay bills online using credit cards. All of these things are ways of encouraging us to amass debt. In this article, I want to share the second secret to successfully paying off debt.
Sometimes, if it’s possible, it’s best to save money and not use your credit cards. If you’re disciplined, you can use your credit card; but on a monthly basis and then pay it off, so there’s zero balance being carried over each month.
People do this for several reasons. One, it’s easy. You can keep track of your assets and expenses on a monthly basis. Two, there are side benefits such as points towards rooms, such as a Marriott credit card, or points that could be used for travel. Some people use it for cash back.
It seems that the world is filled with two types of people; those who are able to have discipline, who have a credit card and pay if off every month and the rest of us who don’t have that discipline and thus, unfortunately, carry a balance every month… that keeps on building and building and building.
Where do you fall? Even if you’re successful and you have been able to save a lot in your retirement plan, or several hundred thousand or more inside of your 401(k) plan, you probably and might still have credit card debt. I recently wrote an article about ways you could learn how to pay off credit card debt, and specifically I talked about the first secret to paying off debt.
I talked about the importance of spending money towards both paying down the credit card debt, and equally towards increasing your personal emergency saving fund. I’ve included a diagram that shows the explanation of the some of the text of that secret.
I have tried this before, on myself and with others, and it does work. However, it does not answer the bigger questions.
The bigger questions are why do we have debt, why do we feel comfortable amassing so much debt, and why is it nearly impossible for us to pay it off without some form of changing a pattern? Obviously, changing the pattern is doing exactly what the ‘so called’ experts say ‘not to do’… which is save money and pay off debt, as opposed to just paying off the debt.
The answer to why this works is deeper. When we were at a young age, we were encouraged to amass debt. There is a deeper, darker secret going on in the U.S. economy. The U.S. economy is brought up by spenders. The more we spend, the better our gross domestic product; and by our consumption rate of goods and services, the higher the stock market goes. It’s a never-ending cycle. You’ll see an increase in the stock market whenever consumers are saving less (and spending more).
We are encouraged by these companies to spend money. Now unfortunately, most people don’t have a large surplus of money to spend. In fact, most will retire with less than $25,000 to their name, so where can people find money? The answer is, they can borrow it. They can start the never-ending cycle of building up debt… which they will have to service…thus tapping themselves into borrowing more money, in order to spend more money.
The system continues to encourage this type of spending at all levels, including most corporate levels. The current reward system for corporate America is ‘how are we doing each quarter’…not how are we doing two to five years from now. The CEOs of publicly traded companies are usually directly rewarded by how much they have either saved their company or made in additional income, in a three month period.
There is no deeper incentive for a CEO to focus on anything more than the immediate — this creates an economy of “what have you done for me lately?” The CEOs of these large, publicly traded companies are encouraged to increase share price. The way to increase share price, is how much income do they make now, as opposed to how much are they making in three to five years.
If you ran your own business, and your only goal was to increase revenue and income right now, today, and not worry about what happens two years from now, you would often find yourself in two years, out of business…especially if you didn’t:
- Reserve money, save money, or plan for the future
- Put money into RMD
- Do what a prudent business owner would do
- Spent just enough money currently to generate income right now
- Sacrificed the future for today
If you, as a small business owner, ran your business like that, in two years or so, you would be gone. However, if you ran your business like that as a corporate American company, you would NOT ONLY BE OK, you might even be rewarded.
Corporate America is designed for short-term greed, and there is a system that has been placed here that is encouraging people to spend more on consumer goods, in order to increase the short term needs of companies. This system is called the debt system. You’re encouraged from an early age, such as going to college, all the way up to when you graduate, to amass and incur credit card debt. And, even when we retire with less than $25,000, we are usually still in that cycle of carrying that debt.
How to break the cycle
The best way to break the cycle is to stop playing the game. Do not agree to take on more debt. Do not agree to help short term players out there, and only look for companies that have a belief system of long term gain.
Such companies usually are the ones that have longer histories of dividends. Some of those companies are for example: Kraft, AT&T, Southern Energy, and other high dividend paying companies. The truth is, that these value companies are savers. These long term value companies are being ‘rediscovered’ during this year of uncertainty, and they will continue to rise this year.
Don’t play the game of debt anymore. Instead, do what I always say at the end of every article.
Remember, plan today… protect tomorrow.
Until Next Time,
Peter Blatt is the president at Blatt Financial Group. He has more than 17 years’ experience in the financial industry. He received a bachelor’s degree in accounting from Boston University, a law degree and a post doctorate degree in tax from the University of Miami School of Law. He is an active member of the Florida Bar Association, the Palm Beach County Bar Association and the former secretary of the Tax Section of the Florida Bar. He has been published or quoted in numerous periodicals including The Wall Street Journal, Yahoo Finance, SUCCESS Magazine and on Fox Business News.