Debt is not just part of our lives, or even our culture. It could be argued that debt is hardwired into us as human beings. Loaning and borrowing transaction records can be traced all the way back to biblical times and even ancient Egypt. Credit cards were launched in the early 1920’s through department stores offering “courtesy cards” for purchases within their store. This set off a trend, creating a domino effect leading to “diner club” cards in the late 1920’s and then in 1958 Bank of America initiated mass competition by issuing a credit card accepted by a wide variety of merchants. This credit card was only utilized in California for several years, but in 1966 it finally ventured to other states.
This new method of purchasing spread quickly creating new opportunities, as well as new problems. Obviously, we can see the impact credit cards have had on our society decades later, but we need to understand the ripple effect of this issue.
Generation X (which are those born between 1965-1980 according to Business Insider) was undoubtedly hit the hardest by the credit card crisis.
Based on 2019 The Fiscal Tigerreport with data collected from multiple sources, including Experian, Generation X has the most credit card debt of any age group. “Most Gen Xers got their first credit card by the age of 24, so they are programmed to use plastic,” says Melissa Davidson at The Fiscal Tiger. This generation was the first young group exposed to credit cards, had no guidance or understanding of the usage implications, and have since then been chewed up and spit out with plenty of debt and PTSD to spare. This is why there are so many “debt gurus” who are fighting to be #1 on the FM/Sirius radio stations or weasel into churches to launch their own groups. These gurus know this is a widespread problem that affects an entire generation so why not capitalize on it? So now, we have a large group of people terrorized by financial struggle, being shown a shimmer of light at the end of their tunnel, being led to a “financially free” lifestyle on the chassis of paying off every debt as fast as possible. Not to mention, GenXer debt warriors have been and continue to recruit the next generation by levying the same debt-free idealism on their children
Can we pause here to clarify something? Please hear this message that paying off debt is not a bad way to spend money. In all transparency, my parents were terrible at finances and budgeting which led them into serious debt. They did attend some church classes, read the books, and followed the programs which helped them climb back into a sense of normalcy, so I am forever thankful for that. I completely understand and have lived in the ominous presence of debt hanging over every aspect of life.
But ALL DEBT IS NOT CREATED EQUAL. The concept of budgeting, living within your means, and paying off credit card debt is foundational (you don’t have to pay hundreds of dollars to know that). However, allocating every dollar towards paying off or even avoiding interest (specifically low interest) has a much higher extrinsic cost than what most realize. Herein lies the problem. In my financial planning experience, all too often I have met individuals ready to head into retirement with their house, car, and whatever other liabilities they had paid off.
This is a great accomplishment but unfortunately, it is typically partnered with the car having 120,000 miles on it, and needing regular repairs. The home also has regular maintenance requirements as well as ongoing taxes, insurance, and utilities. The kids are out of the house, but grandkids come along and other basic living expenses still seem to come rolling in. So, although their debts have been paid their savings are minimal leaving them in a struggle to create reasonable cash flow. There are only two options when it comes to the utilization of money: you can either pay interest or lose the ability to earn interest. That’s it. To know where the equilibrium of cash flow falls and how money should appropriately be allocated, we must understand the way money works.
Money and math are very different which cause confusion in basic financial understanding as most of us are trained to think mathematically. Let’s dive into the two different calculations to consider when factoring in where money should be spent, and see where that balance falls.