When I first moved out of home, I was a little overly optimistic about what I could spend and still be OK. I was young, ambitious and forgot that the generation ahead of me weren’t born into their comfortable, middle-class lifestyle.
So I bought a laptop computer. It wasn’t a top-of-the-range laptop – it was just a low-spec’d machine that would enable me to type lecture notes and take my studies with me wherever as was convenient. Nevertheless, it was more than I could afford to spend.
I maxed out my card.
I had a limit of about $xxxx at the time, but I only worked on a part-time basis around my full-time study. This was going to take a LONG time to pay back, and a lot of discipline. All the while, interest was multiplying like a virus.
In an unusual run of bad luck, I wrote my car off at about the same time. (No – nothing as terrifying as wrapping it around a pole – I simply didn’t keep the fluids topped up under the hood, and it was an old car. One day the engine overheated and seized.) I lived a good hour’s drive from my place of employment, and 1.5 hours from my college campus. I lived 45 minutes from my parents’ home. Public transport in the area I lived was very limited. I needed a car.
AND there weren’t any laundromats near where I lived, so I was driving to my parents’ home each week to do my laundry. I needed a washing machine.
I’ll bet you can guess what happened. I took out a loan. I bought a car, I bought a washing machine and I paid off my credit card.
But now I was in debt to the tune of $xxK, and I STILL only had a part-time job. AND the temptation of a $xxxx credit limit on my card.
It took me 3 years, and I paid down that loan with a LOT of hard work. THE most intelligent thing I have ever done financially, however, was to cut my credit limit DRASTICALLY. I changed my credit limit to $xxx. On a part-time income, with living costs and a loan to service, and the same need for occasional retail therapy that afflicts most young women? A higher limit than that would have been begging for more debt trouble.
Over the course of those three years, after I graduated from college, I grew to be very successful in my work and by the time I paid off the loan I had secured for myself a contract role that was bringing in a good income.
Do you know what happened to my credit limit, after I was back in the black and my income had improved?
THE 25% RULE
I NEVER allowed my credit limit to exceed 25% of my monthly income.
The benefit of this was that I could still make online purchases or leverage small amounts of credit where I saw an opportunity to win. But I could ALWAYS pay my card off within a single pay period without impacting my general living expenses, and I NEVER ran the risk of amassing interest-debt.
Essentially this kept my risk completely contained. The worst case scenario was that if I made a budgeting mistake and spent too much, I could clear ALL debt the very next pay cheque, and still have enough money to meet all living costs and financial obligations. I just might not have much disposable income that particular month. This served me incredibly well in the years that followed.
I offer this little story of my own mistake and lessons learned to anyone who is just starting out and is tempted to spend more than they really can. It’s just not worth it. Hold out for the weeks or months it might take to save a bit more in order to be able to afford your needs/wants over the early years and to buy them free and clear. Don’t start playing with debt until seeking financial advice from someone qualified to dispense it. Contain your personal financial risk until you are better established and know what you’re doing.
My financial situation is very different, post-convent. When you leave religious life, typically you leave with little more than the clothes on your back. So I’m getting established all over again. But I’m pleased to say I no longer have a credit card. Each thing I purchase, in my moves to get more established in my post-convent life, is something I have saved up for until I can buy it outright, without having bad debt hang over me.
There is a place for the use of credit – but not in personal spending. Purchasing real estate or investing is, 99% of cases, going to demand more than what one’s personal bank balance has to offer. Credit is a useful tool; yet when it ceases to be a tool and you become its slave, it can be a very cruel master.
FINALLY – NEEDS vs. WANTS
I don’t need the latest, highest spec computer on the market. I don’t need $400 coats or shoes. Evaluating the difference between needs and wants, and limiting one’s personal credit risk – you might not be living life in the fast lane, but you’ll enjoy the freedom that comes with being safely in the black.