None of us are born in debt. We all start out in life with a clean slate. But we can fall into traps along the way. The most common trap I’ve encountered is committing to a future lifestyle that is not based on current income.
This can happen early with college students. For example, Sandy is 21 and lives at home with her parents. She earns $20,000 a year. Her parents cover her basic living expenses while still in college and she covers her personal expenses.
Recently, Sandy’s car died. She intended to buy a used car, but fell in love with a new Mustang. She went from no car payment to a monthly payment of $550, plus by adding insurance, gas and maintenance. This could total 60 percent of her take-home pay.
Assuming Sandy has committed herself to this payment for the next five years, she is now not likely to move out on her own as expected. Meanwhile, Sandy feels a cash crunch and she starts to pay items on credit, like gas, clothes and entertainment. Soon, she discovers that she’s built up thousands of dollars on credit. When the bill arrives each month she can only make the minimum payment.
Sandy has made spending decisions that commit her future earnings to pay the car and the credit card. Obviously, we are all hoping that once Sandy graduates from college that she will get the job that will get her back to a clean slate.
This is the trap I’ve seen many people get into. Generally, we begin by supporting ourselves and we can get used to instant gratification. After all, we usually don’t have to worry about feeding or clothing others or having to ask permission to spend and we have easy access to credit. And since our friends are usually just like us, it seems normal and right.
Many people can avoid this trap by spending less than you earn, saving for future purchases and avoiding the use of debt. This way if your income or lifestyle changes, you will be more likely to handle a financial change. Don’t commit tomorrow’s income today.
For more information contact Rebecca Robins, CPA/PFS, CFP™, CA Insurance Lic#0D75745, at 661-222-2331. Securities offered through Associated Securities Corp. (ASC), Member: NASD/SIPC. Advisory services offered through ASC and Associated Planners Investment Advisory, Inc., Registered Investment Advisors.