Thriving in the Post Credit World
Imagine, if you will, only spending the money you make (and not that which you have on a credit line), putting money away for the future and never borrowing money from any financial institution again. Can it be done? Absolutely. Does it take discipline? Absolutely. Is it worth it? Duh!
Our economy was on the brink of self-destruction last year because of a collective addiction to credit. It doesn’t take a genius to figure out that you can’t live that way forever. Well, whether we like it or not, as of October of 2008 the personal credit game was over. The buck stops here, the jig is up, party’s over, etc. A new model is inevitable, and the people who going to thrive are those who pick up on that the quickest. It takes knowhow, strategy, and maybe a little bit of expert help, but it can be done.
How Did We Get Here?
In the 1980s there was a paradigm shift in American spending habits. While credit cards had been around in some form since the ‘50s, a combination of technological limitations and strict usury laws had limited their usage by the US population. Americans were taught to save up over time for large purchases, put them on layaway or, for major purchases (such as a home or a car) borrow the money directly from a bank.
But in 1980, tough economic conditions and an obscure but important Supreme Court ruling opened the flood gates for banks to offer credit cards to the masses. The credit card business was floundering at the turn of the decade because inflation rates were higher than the interest rates NY state law allowed lenders to charge. A 1978 Supreme Court ruling allowed banks to export interest rates from whatever state the decision to lend was made. States like South Dakota and Delaware, eager to bring lucrative finance jobs to their states, quickly became pro-bank havens. Additionally, developments in technology facilitated faster communication between retailers and banks. The credit card industry was booming, and Americans were using their cards more than ever.
What followed was a massive effort by banks to shift the cultural mindset of Americans towards “spend now” and instant gratification. The credit card industry was literally expanding the US economy, and no one had more to gain than the banks themselves. "Banks had a multi-billion dollar mass-marketing strategy that led to the Nike 'Just do it' consumptionism -- the effort to get the new generation to reject those old school values,” explains Dr. Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit. The whole idea of saving for what you want and paying on layaway became an arcane way of approaching purchasing. Bank cards became the way of obtaining everything from groceries to trips to furniture to timeshares. It is this mentality that has, in many ways, led us to our current circumstances.
The Remedy?
The new paradigm is living debt free. It is paying off debt. It is saving for purchases.
The new model requires two strategies – budgeting and savings. I have had what I refer to as my “purses and paychecks” principal. If I buy a small purse, I organize it and manage with the space I have; if I buy a large purse, I need all sorts of things in it until it gets too heavy to lift. If I have a large paycheck, I can spend that as easily as a small one – it’s all a matter of what I need. I recently found out that someone else had actually named this principal (I thought I had come up with it myself!). It’s called Parkinson’s Law. I think Cyril Northcote Parkinson had a vision of our future when he said “A luxury once enjoyed, becomes a necessity”.
Here’s the thing: at near record-low interest rates, there is no good place to save your money – not savings accounts, not treasuries, not CDs. With the roller coaster ride of the stock market, there’s no good place to invest. If, however, you are willing to budget yourself, take some time (years, not months – sorry no instant gratification here), you can live not only debt-free, you can use your own money to build wealth and stability. If you have a strategy, discipline, and the right team supporting you, it can work.
Our economy was on the brink of self-destruction last year because of a collective addiction to credit. It doesn’t take a genius to figure out that you can’t live that way forever. Well, whether we like it or not, as of October of 2008 the personal credit game was over. The buck stops here, the jig is up, party’s over, etc. A new model is inevitable, and the people who going to thrive are those who pick up on that the quickest. It takes knowhow, strategy, and maybe a little bit of expert help, but it can be done.
How Did We Get Here?
In the 1980s there was a paradigm shift in American spending habits. While credit cards had been around in some form since the ‘50s, a combination of technological limitations and strict usury laws had limited their usage by the US population. Americans were taught to save up over time for large purchases, put them on layaway or, for major purchases (such as a home or a car) borrow the money directly from a bank.
But in 1980, tough economic conditions and an obscure but important Supreme Court ruling opened the flood gates for banks to offer credit cards to the masses. The credit card business was floundering at the turn of the decade because inflation rates were higher than the interest rates NY state law allowed lenders to charge. A 1978 Supreme Court ruling allowed banks to export interest rates from whatever state the decision to lend was made. States like South Dakota and Delaware, eager to bring lucrative finance jobs to their states, quickly became pro-bank havens. Additionally, developments in technology facilitated faster communication between retailers and banks. The credit card industry was booming, and Americans were using their cards more than ever.
What followed was a massive effort by banks to shift the cultural mindset of Americans towards “spend now” and instant gratification. The credit card industry was literally expanding the US economy, and no one had more to gain than the banks themselves. "Banks had a multi-billion dollar mass-marketing strategy that led to the Nike 'Just do it' consumptionism -- the effort to get the new generation to reject those old school values,” explains Dr. Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit. The whole idea of saving for what you want and paying on layaway became an arcane way of approaching purchasing. Bank cards became the way of obtaining everything from groceries to trips to furniture to timeshares. It is this mentality that has, in many ways, led us to our current circumstances.
The Remedy?
The new paradigm is living debt free. It is paying off debt. It is saving for purchases.
The new model requires two strategies – budgeting and savings. I have had what I refer to as my “purses and paychecks” principal. If I buy a small purse, I organize it and manage with the space I have; if I buy a large purse, I need all sorts of things in it until it gets too heavy to lift. If I have a large paycheck, I can spend that as easily as a small one – it’s all a matter of what I need. I recently found out that someone else had actually named this principal (I thought I had come up with it myself!). It’s called Parkinson’s Law. I think Cyril Northcote Parkinson had a vision of our future when he said “A luxury once enjoyed, becomes a necessity”.
Here’s the thing: at near record-low interest rates, there is no good place to save your money – not savings accounts, not treasuries, not CDs. With the roller coaster ride of the stock market, there’s no good place to invest. If, however, you are willing to budget yourself, take some time (years, not months – sorry no instant gratification here), you can live not only debt-free, you can use your own money to build wealth and stability. If you have a strategy, discipline, and the right team supporting you, it can work.
posted by Erica Minchella at
8:24 AM
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