A small amount of credit card debt may seem innocent enough. But, the long-term effects may crush your chances of any decent retirement. The effects are more psychological than physical. If you are in your twenties, you could quickly wipe out a couple of thousand dollars of debt.
What I’m talking about is the psychology behind debt; being comfortable with debt can be poisonous if not deadly. In my twenties, I overspent my income and piled up some debt. The effects of overspending can be addicting.
Once you start using credit cards without a plan, it’s way too easy to throw it down and keep the good times rolling along. It took me a sudden wake-up call to put a stop to my credit spending and start on a debt payoff/savings plan. For many though they never see the downside and can end up with severe problems, especially into retirement.
I have three ways that lousy spending habits now can wreck you well into retirement.
Retirement Planning Tips #1 | The compounding interest owed every month stretches to unmanageable amounts.
If you’ve ever heard about the effects of compound interest, maybe back in school. You know that when you start with a small amount and a lot of time, it can grow into a much more substantial amount with just the effects of time.
The less time you have, the less money you will have from the interest. This is why everyone suggests starting to save and invest when you are young to take full advantage of the compound interest factor. Time is your friend. Did you ever think this happens in the other direction on your credit cards?
In this case, time is your enemy. Credit card debt can pile up fast if not paid off every month. Now let’s say we use the credit card as cash for money we don’t have. Then we don’t pay it off. Not only is the interest compounding every month, but we are adding to the bottom line every month. Compounding debt interest is a dangerous combination if left unchecked.
Retirement Planning Tips #2 | The parameters as to what seems to be acceptable limits stretch.
The acceptable limits trap was my biggest problem. Spending can get addicting. The limit you think you can tolerate keeping things paid up keeps getting larger. We spend a little on the card with the complete plan of paying it off. Maybe for a little while, we do pay it off every month, and everything is okay. Then we spend a little more and a little more. Maybe even still paying it off every month.
Then one month, our spending habits remain the same, but something else comes up, and the money to pay the card isn’t there, and we roll it into the next month. For me, It wound up like this. I spent some money buying things with the card hoping to turn them around to make some money.
When deals fell through, I ended up not selling the items. The interest started piling up to the point that the stuff I bought to arbitrage wasn’t worth the money I paid anymore. The interest on the credit card pushed my cost above the selling point, and when I did sell the items, it wasn’t enough to pay off the card.
Now, couple that with the fact that my spending was out of control. I was a mess financially. Your comfort limits will grow over time if not kept in check and on a budget.
Retirement Planning Tips #3 | The amount we should have been putting towards retirement or nest egg savings ends up getting spent on interest charges.
Now let’s look at what happens to all that money we spend on interest charges. Paying on interest has a significant effect on our retirement because the money we could be saving for our nest egg ends up getting put toward interest on our debt. We could be using compound interest to make money, but instead, we are using compound interest to lose money.
That interest is a double-edged sword that cuts both ways. It can make us or break us. And it is all psychological and us being mindful enough to lay out a good plan. I’m envious of the kids getting out of high school or college who already have this figured out. It took me way too long, and I’m out thousands of dollars because of mistakes I’ve made.
The big thing using compound interest to set you up for retirement instead of letting it put you way in debt. I see too many people having to work well into their retirement years just because of mistakes they have made early in life. The real problem here is that our society is set up to push you into credit because there is money to be made from issuing credit. But, that is a whole different topic.
The good news is it’s never too late. Changing spending habits at any age can save just about anyone from a treacherous retirement. All you need is a good plan and the willpower to see it through. Planning for financial freedom is what I talk about in great detail in my mailing list.
My mailing list is a bunch of like-minded people who all want to build the life they choose instead of other people picking it for them. It’s a life of financial freedom, and for most of them, it’s a life out of their nine-to-five jobs.
Till next time, be safe,
Kevin