Chapter 7 - Debt Creation

By Richard Valentine Reily, author of Gregory's Hero.

Before we get into debt reduction itself in the next chapter let’s take a look at the root causes of debt and how you get to the place where debt reduction becomes a priority.

Remember when we discussed the ice cream truck and the piggy bank exploding, landing your financial future strewn across the landscape in a clattering mess? Oh, and don’t forget that irritably polite and well mannered boy with the neat clothes who always stopped the ice cream truck in the same spot.

Debt creation is the result of poor spending habits. That’s it. Okay, I know you can go off onto all sorts of rationalizations; my car broke down and I had to fix it; my mortgage payment was late and I had to take a cash advance to pay it; my business was failing and I had to borrow money to keep it going; that red dress was just too beautiful to pass up, and my friend got that new green one a week ago; I feel so much better when I get something new. How many more shall I write down for you? I can fill the book if you like!

Nothing changes the basic point here: debt creation is the result of poor spending habits.

All of your life you live nicely being given the things you require and lots of things you don’t require yet seem to need. You need nutritious food. Clothes, yes you need those too. Shelter is a necessity, particularly in the winter in the north, and air conditioning in Florida in the summer. And, sorry to say that is about it in the need department.

People have lived quite nicely for millennia without television in every room, playstations, CD’s, DVD’s, CdRW, DVDR’s, PC’s, baggy pants that show more underwear than they cover, $200 sneakers (that cost about $2 to make in China) $100,000 cars, even $25,000 cars for that matter, cell phones, $100 dinners out, and all the other junk and baggage that clutters up most homes and bogs down the credit card statement.

If you still don’t believe me take a ride around your neighborhood and look into the open garages. Most are stuffed floor to ceiling and wall to wall, and those that aren’t still can’t fit a car. The rare homeowner can get two cars into a two car garage. At our house the rule is that the cars must fit in the garage. Not only are the cars usually clean, warm in winter and cool in summer, there is no place to allow the accumulation of ‘stuff’. Since it can’t be accumulated, there is no reason to buy it in the first place.

Oh, by the way there is one very important non car item in the garage. The paper recycle bin. It is particularly handy for depositing the endless stream of credit card offers and transfer checks on the way in from the mailbox. Those things are not allowed in the house.

After you have finished your loop to check out the neighbor’s garages, take a drive around your area and you are certain to quickly find some brand of self storage. Even after all the useless junk and baggage is acquired the spending continues in monthly expense to store it all!

Along with poor spending habits a certain social dynamic steps in to help out very nicely with debt creation. Age.

There comes a time in most lives where Mom and Dad make it clear that it is no longer acceptable to live under their roof. Sometimes it’s friends who help make the decision by communicating it is no longer cool to live at home. As comfortable as home is, the time arrives for you to test you wings and fly free. More like fly straight into the poor house.

Mom and Dad have spent a life time acquiring things that make life comfortable. With each major acquisition that is finally paid for their spending was freed up to acquire more and more. At the same time, their income was rising. They spent more time in their jobs or fields, acquired experience and became more valuable as employees. Their earnings increased. At some point for them a critical mass was reached where they simply did not buy enough more things to consume all the new value they created for their employers and savings began to pile up for them. Usually they bought nice things for you.

Now it’s time to go out on your own. Your earnings level is probably the lowest it can be and hopefully the lowest it will ever be. Minimum wage is about what you will earn for quite a while as you either finish your education or begin your career. All the while you will have to take on the expenses of a home, transportation, clothes, furnishings, electronics and all the little things that make up a life.

What is your standard? How do you know how to set up your life? Where will you live and what sort of things will you put into your new home? You need a model.

Your parent’s home will do nicely. After all it’s all you’ve ever known. It is the only frame of reference you have acquired in your life.

You are not likely to move from the green lawn suburban familiarity to the refuse strewn desolate streets of an inner city. You are not likely to forgo the comfortable furnishings of Mom’s living room for tattered, mismatched and well used thrift store furniture. You are likely to head right on down to the department store for that new $80 button down shirt when the first real job interview comes up. Because that is what you know.

With low income and high expense how do you make it work? What bridges the gap? Why your friendly credit card company of course. Right in your mail box offer after offer lauding your wonderful luck at being chosen to receive an exclusive opportunity to get your unmarred credit score supremely messed up arrive day after day.

Now you are in possession of the perfect formula for debt creation, easy credit to fulfill unrealistic expectations compounded by low earnings. I have often said that the single most difficult financial lesson I ever learned (had to learn) was to live on my income, not my father’s.

Exactly what does that mean? It means that the most crucial financial lesson when starting out in life is defining your personal standards.

Ask the age old boring questions. Who, what, when, where and how.

Who will you live with; a roommate, alone, a significant other, a family member?

What will make you strike out on your own; you are told (or finally booted out because you won’t make the break on your own), circumstance forces you out (like going to college, your parents move away or there is a death in the family) or when you have had enough of being told what to do and when to do it (the price of living for ‘free’).

When will you make the break? When you have enough money saved up? When you turn 21, or 30, or 40?

Where will you live? In a rented room, an apartment, a mobile home, a house?

How will you make it work? Will you get a job; borrow from family, hope for the best?

My father did very well. I don’t know the numbers and with time they no longer mean anything, though the scale is similar. Get this; I am one of ten siblings. Ten, can you imagine feeding ten kids? We lived in a house in the Forest Hills section of Washington, DC, near Chevy Chase Circle. Most of the kids had their own room. There were maid’s quarters.

Dad had a new sports car every year, Mother had a new Lincoln every year, and there was regularly a new family car. At some point a motor home was acquired. By any standards, this guy must have been earning.

When I finished school and was ready to head out into the world I quickly found that I couldn’t get ahead financially. Before long I was spending a few paychecks ahead, holding bills, writing checks in anticipation of the next paycheck, running to the bank with any money I came across to cover checks that were certain to bounce.

One day I stopped. I remember that day too. I lived in Steamboat Springs, Colorado at the time and was way out in the mountains one day on a hike by myself. A large outcropping of rock over a deep gorge gave me a fine seat on a fine day to spend some quality time with my reality and that was the time and place I came to the understanding that no one had ever discussed money with me.

On that rock over that gorge on that beautiful day it came to me that my standard of living was incompatible with my earning power. That was the first day of my life that I was awake financially.

Ask yourself who, what, when, where and how now. Understand the answers before you strike out (or are forced to move out) and it is possible to avoid a major financial blunder that most people make.

No matter the source or level of your perceived standard, there are going to be times in everyone’s life when things will be great and times when things will be bad. It is not only OK, it is critical that you be willing and able to refocus resources as events seem determined to lead you away from your place of comfort.

Have you ever heard the boiled frog story? Here it is; you can put a frog in a pot in cool water and place the pot on low heat on the stove. It you will carefully turn up the heat, the frog will cook to death and never simply jump out of the pan. He is more comfortable simply cooking to death than risking jumping out of the pan to conditions he is unfamiliar with.

Most people are the same. They will cling to whatever semblance of security they find even if it fails to ever work for them, or ceases to work for them at a later date.

Define your standard by creating a financial plan. Know what you need to earn to live as you choose, save for a rainy day and save for you future. Allow your standard to change as conditions dictate and learn to anticipate short term changes to allow yourself to stay on the plan.

If you plan to live in the best area of town, drive a new Porsche every year, drink rare wines and wear designer fashion then plan your earnings to support that standard. When your earnings fail to support that standard, be prepared to move, trade down your car, learn to like beer and visit a thrift store for clothes.

Never allow debt to be the cushion for your unwillingness to alter your standards. Alter your standards and avoid creating debt.