Getting a handle on your finances might scare you.
We get that. If you’re in debt and you don’t have a set plan for yourself, there are a lot of unknowns just kind of floating around out there. You aren’t quite sure how much you owe on your credit cards or even how much you’re paying on them each month.
You really don’t have a good idea of how much you’re spending every month or where you could possibly cut back if you had to.
And for many of us, we don’t think much about how we’re earning because our paychecks are automatically deposited into our checking account.
If we give our finances a hard look, what will we find? Will it be worse than we expected? Will you be shocked?
These are the kinds of questions – fears, really – many of us have when we approach our finances. But here’s the tough part of all this: if you don’t conquer your fears, the years ahead are going to be pretty difficult.
In order to change that future, we need to analyze the present. What are the mentalities that we hold on to that make it hard for us to face the facts and create a plan to get ourselves out of debt? For the next few minutes, we’re going to devote our efforts to uncovering those mindsets.
The goal? To break free of what’s holding back our financial life so that we can move forward, gain control of our money and start shaping a healthy financial future for ourselves.
The Scarcity Mindset: I Don’t Have Much
At one time or another in our lives, we’ve come to that point where we realize that the money in our bank account isn’t enough to cover all the things we want and need to do. Our money is scarce, so we adopt a mindset of scarcity.
We talked with Grayson Bell (@debtroundup), president and CEO of Debt Roundup, a personal finance website that helps consumers get out of debt, save extra cash and make money through investing. He explained to us the “mindset of scarcity.”
“Basically, you believe there’s never going to be enough money so everything you do is done with a mindset that you are lacking,” Grayson said. “You don’t want to do anything with your money.”
This mindset ends up making people hold on to the cash they have rather than using it to pay off debt.
“They just hold on to it … not in a way that increases wealth, because they don’t invest it or save it,” Grayson said.
This is a pretty understandable position, we believe. Think about it. Money is tight and you don’t want to use what little cash you have to invest or save because you’re worried you won’t be able to make rent or pay for internet, electric or water bills.
But, Grayson said, what ends up happening is these same consumers end up spending their money anyway.
And this brings us to our next point – not knowing the difference between needs and wants.
Do You Need It or Do You Want It? Why Your Answer Matters
There’s a big group of consumers who approach their spending as if wants and needs were the same. Car shopping is a good example of this.
“You may need transportation, but you want a BMW,” Grayson said. “Then you … justify spending $40,000 or $50,000 on an entry-level BMW.”
This is a pretty big example, but the mentality behind it trickles down into everyday habits. We buy new clothes rather than saving for a bill that’s coming up, or we go out with friends for drinks even though you know you should spend the money on groceries.
“When you don’t classify what a need is,” Grayson said, “you go out and spend money on what you want.”
Our advice? Next time you’re debating whether you should spend your money on a night out with friends or save it for your electricity bill, ask yourself this question, “Do I want it or do I need it?”
You’ll be surprised how often you realize you don’t really need something.
My Debt Isn’t My Fault; I Blame the Lenders
This mentality is a big one these days. In the wake of the financial crisis that sent America into the Great Recession, consumers came away feeling bitter toward big-business lenders like banks, federal student loan programs and credit card agencies.
Some of this bitterness was warranted; banks were giving mortgages to consumers whose credit history said they probably wouldn’t make their payments.
This led to the same banks betting those same consumers would fail, which led to (after the fact) an endless stream of criticism from newspapers, magazines, blogs and books like The Big Short, which was adapted into an Academy Award-winning film.
But we believe, along with Grayson, that the average consumer should take responsibility for his or her debt because, in most cases, you are the only one who can get yourself out of your financial black hole.
Grayson knows; just a few years ago he found himself in more than $70,000 of debt.
“Nobody got me in a lot of credit card debt. I did; it was my fault,” Grayson said. “When you deflect blame, you are never going to be out of debt because it’s everyone else’s fault.”
While there are predatory lending tactics out there (payday loans are a good example), most loan and credit card offers are contracts we choose to sign.
“You’re the one signing the papers, whether it’s a credit card application or a mortgage application or any type of financing,” Grayson said. “You can’t blame the system around you.”
In other words, each of us needs to break out of our victim mentality and start to take control of our financial choices. But that will never happen if we continue to play the blame game.
“Over the years we’ve gone downhill by blaming circumstances around us rather than our own financial choices,” Grayson said.
“Over the years we’ve gone downhill by blaming circumstances around us rather than our own financial choices.”
We think this argument goes hand-in-hand with the wants-versus-needs mentality. Whenever you’re considering a credit card, car loan, mortgage or other lending avenues, ask yourself, “Do I really need to enter this contract? Do I have the discipline to pay this back every month?”
If your answer is no, step away from the application and save it for another day … preferably a day in the future when you’ve got your finances straightened out and you have the money to buy what you need (more on that in future articles!).
This is easier said than done, though. There’s a lot of pressure in America to buy the latest gadgets and fashion. In the next section, we’ll take a look at consumer culture.
Keeping Up With the Joneses is Great … If You Can Afford It
It’s hard to say no to the latest iPhone when your Facebook page and Twitter page are blowing up with photos, rave reviews and praise for it.
That urge to have the latest and greatest drives us deeper into debt (especially with credit cards…swiping is so easy) and keeps us from creating a financial plan, said Gyutae Park, one of the minds behind personal finance site Money Crashers (@Moneycrashers).
“A lot of people think that credit card debt is a part of life and carrying those high balances is simply unavoidable in order to maintain a certain lifestyle,” Gyutae said. “The idea of ‘keeping up with the Joneses’ is a big trap that a lot of families end up in. They’re likely never going to have enough money to keep them happy.”
But here’s the thing; the consequences of credit card debt are bigger than your monthly bottom line.
“Spending via credit cards doesn’t feel like actual money to the average consumer, so it’s much easier to rack up a big pile of debt,” Gyutae said. “They end up paying for it later, both financially and emotionally.”
“Spending via credit cards doesn’t feel like actual money to the average consumer, so it’s much easier to rack up a big pile of debt.”
We think Gyutae brings up a good point – the effects of debt go beyond your bank balance. In fact, debt can lead to physical damage as well as emotional damage. To validate this claim, we took a look at some interesting data compiled by WebMD.
The Debt-Stress Connection Can Cause Some Serious Health Problems
Financially speaking, debt’s consequences are pretty straightforward. Your credit card balances tend to be high, bringing down your credit scores and making it more difficult to get good rates on loans. It can lead to a scarcity mentality, like we talked about a few minutes ago.
But one of the hidden costs of debt that we don’t always discuss is stress. Mayo Clinic, one of the leading medical research and treatment hospitals in the country, pointed out that the American Psychological Association said in 2007 that money is the leading cause of stress in the United States (and this was before the housing crisis and recession officially began!).
WebMD calls this the “debt-stress connection.” The results can be as severe as a heart attack, but often show up as ulcers, migraines, back pain, anxiety and depression.
Cox told WebMd, “The true cost (of debt) is the toll that it's taking on your life and your relationships.”
Marriages are particularly vulnerable to the stress money creates; it often shows up on lists about top reasons for relationship turmoil, like an article this past September by The Huffington Post about the most common reasons for divorce.
When we look over the research and the advice from money experts, we think it’s pretty clear: the mindsets keeping us from paying off our debt can affect the most important relationships in life.
If you find your relationships are going through tough times because of your financial situation, there are plenty of resources out there to help you repair those relationships and create a financial plan to get you out of debt.
We’ve talked about four mentalities so far, but we want to circle around to one more mindset before we close out this article.
We Just Don’t Have the Time or Resources to Plan Our Financial Future
A lot of us tend to look at our debt and feel overwhelmed. It’s like we’re facing a big monster and we can’t even begin to imagine how to bring that monster down. The sacrifice of time and energy it would take to plan a strategy of attack and then to faithfully follow that plan is too much, we think.
But those are the kind of mentalities that hold us back from creating a plan for slaying our debt and finding victory over our finances.
Money Crashers’ Gyutae Park had a lot to say about these mentalities. We think he’s got a great perspective because he acknowledges how busy life can get, but he still emphasizes the importance of facing your financial fears.
“We have this idea that it’s too much work and too time consuming for us to deal with our finances,” he said. “We’re focusing on work, taking care of the kids and dealing with all the errands and chores we have.”
It makes sense, then, that most of us think, Gyutae said, “Who has the time to think about long-term financial goals?”
We also tend to get totally discouraged by the sacrifices we have to make in order to pay off debt.
“Another mindset we have is that it involves too much sacrifice to plan,” Gyutae said. “It’s much easier to take the easy way out – to splurge on unnecessary expenses that are out of our budget or to spend countless hours in front of the TV instead of planning and slowly building wealth.”
Wrapping Up: There’s Some Good News Ahead
Bringing our financial situation out into the light can be a truly scary thing. And let’s be honest; admitting that we’ve been blaming others for our debt or making excuses about why we don’t have a financial plan is embarrassing, right?
If you have debt you can’t seem to pay down, you probably fall into one of the categories we mentioned:
- The scarcity mindset
- The blurring of the line between what we need and what we want
- Blaming others for our debt
- The pressure of consumerism
- The claim that we don’t have time or resources to create a financial plan.
But do you know what the good news in all of this is? First, you aren’t alone. The average American household who is in debt has about $15,000 in credit card debt and about $129,000 in total debt. In fact, according to consumer finance site Nerd Wallet, Americans as a whole are nearly $12 trillion in debt! That’s a totally crazy number.
That’s not the end of the story, though. The second point we want to make is that creating a plan to get out of debt begins with simple steps and isn’t nearly as hard as you think.
All the sacrifices you’ll have to make are just temporary. In the long run, you’ll be happy you gave up little luxuries for a few months or years so you can enjoy a stress-free life for decades.
In our next article, we’re going to talk about the first step in the journey to personal financial freedom: budgeting. We’ve chatted with a few experts and done some research to provide you with a solid resource for turning your financial situation around and, maybe for the first time, controlling your money instead of your money controlling you!