Money Mismanagement

Posted by: Henry B. | Jan 08,2008


One problem I’ve seen is that couples value cash savings so much that they spend money on credit as a way to avoid spending too much liquid money at any one time.  This has some sort of twisted logic, as you’ll be saving cash money in the short term, while paying more in the long term.  The key words there are “more money in the short term.”

This is personal money management run by a similar model to the subprime mortgage disaster.  Here’s another key word: disaster.  The model of going for short term profits over long-term sustainability just doesn’t work.  For the mortgage industry, it was the case of a corporate get rich quick scheme.  Buying on credit may indeed save you money that you can put into the bank short term, but long term you are going to lose the money you saved and then some.  

In some cases it could make some sense to buy on credit now, even with a high interest rate.  Suppose you are set to inherit money two years down the line but cannot afford a basic necessity today, except on credit.  You could make the purchase on credit today knowing that you’ll be able to afford the item outright in the future.  Still, this isn’t ideal because you’ll be paying out all that interest, but it is still somewhat justifiable.  

Most people, though, cannot bank on a great inheritance or a huge bonus in pay that could justify living on credit in the short term.  You could potentially be losing thousands of dollars in interest fees.  Don’t rely on the fact that you may have a greater income down the line to pay off that interest because very often this is not a given.  However, if you’re in an employment situation where you are virtually guaranteed to have a huge jump in salary, you could live off credit in the short term, just as in the inheritance model.  For the most part, the best way to save money is to cut down on credit and spending altogether.  

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