Thursday, February 6, 2014

Debt - Just Say No!

This is part 2 of 14 of my series on the 14 ways I am changing my financial life in 2014.

As just a part of a plan to change my financial life in 2014, I am not going to use debt for the entire year. No charges on a credit card. No new loans. I buy and pay for everything in cash, check, and debit card. Mostly debit card. No exceptions.

UNCOMFORTABLE
On December 30th, 2013 I cut up my credit cards and entered the new year with nothing but the cash in the bank and a debit card. I have to be honest, it made me very uncomfortable.

HOW I USED DEBT THROUGHOUT MY LIFE
I don't like debt. I have counseled people to get out of debt, to avoid it like the plague. Although I have used debt at different times in my life, I feel confident saying that I have never used it excessively. I have had a car loan a couple of times in my life, and I have always paid those loans off years early. It has been 8 years since I had a car loan.

I did not use debt to get an education until my Master's degree, but I had that paid off before I was even done with school. I have owned four homes in my life, each one had a mortgage. Three of those mortgages were paid off when the homes sold, and I still live in the fourth one with a 15-year fixed mortgage. I am working to pay it off a lot sooner than 15 years.

I used my credit cards almost obsessively for every purchase in quest of the almighty rewards points, always paying the entire balance at the end of each month. And I did pretty well at that game, often earning $1,000 or more in rewards in a given year. Outside of potentially missing out on the "points", why did I feel so uncomfortable without credit cards?

WHY I FELT UNCOMFORTABLE WITHOUT CREDIT CARDS
I quickly realized that my use of the cards for years had subconsciously trained me to think of the cards as my back-up plan in case of an emergency. Without the cards, I felt exposed and vulnerable. With the cards, I somehow felt more secure. That is just foolishness.

If an emergency came and I was unable to pay off my balance at the end of the month (thankfully that never happened), then I would have to carry that balance into the next month and start paying interest. That is debt. I don't like debt and do everything I can to avoid it, yet I had somehow allowed my credit card limits to become a layer of my perceived financial security. While I am grateful this scenario has never happened to me, it is simple now to understand why the credit card companies allow a person like me, who has never paid them any fees or interest, to rack up my rewards points? So that when an emergency comes they have me right where they want me.

WHAT SHOULD MY EMERGENCY BACK UP PLAN BE?
Do you know what the best emergency back up plan is? Cash. Hard, cold cash sitting in a savings account called Emergency Fund at the bank. It doesn't charge me interest if I need it, and it earns me interest if I don't (the exact opposite is true of debt). As I allowed myself to become more dependent on my credit as an emergency back-up plan, I also became more neglectful of my need to set money aside in savings for an emergency. That neglect resulted in a very weak emergency fund. I have reversed that, and I'll go into more detail on that process in a future post. A well-funded emergency account has helped me get even more comfortable with my financial situation than when I used credit cards. So, I became uncomfortable without credit cards and have since enjoyed even more security and comfort with a fully-funded emergency fund. More on that in a future post.

CONCLUSION
I started this journey with the hypothesis that using cash and a debit card would translate into less spending. I was hoping to save at least $1,000 per year, justifying the loss of rewards points opportunities afforded by my now exterminated credit cards. Although I will be able to validate or invalidate that hypothesis in another month or two, I'm glad I discovered this little subconscious reliance on debt and got rid of it. Hopefully I'll learn a lot more things like this from the rest of my journey in 2014. Thanks for reading!