Inflation looks likely to accelerate to an estimated 3.8% annualized in the weeks to come, which currently sits at around 3% YoY. We mostly have rising energy and housing prices to thank for the resurgent inflation; however, prices have broadly moved higher in nearly all the categories comprising the CPI in recent months. This comes on top of the four-decade high inflation readings registered in 2022. After 25 months straight of negative real wage growth in the US*, consumers have been faced with a tough choice: adjust lifestyle or borrow from tomorrow.
The quarterly Household Debt and Credit report released by the New York Fed on the 8th this month suggests that most American’s are shifting the cost burden onto their future selves using revolving lines of credit. Credit Card debt in America reached a series high of $1.03T in Q2, 2023, which is a 4.6% increase from just 3 months prior!
At an average interest rate of 22.16%, according to the Fed, it’s hardly a cost-effective way to fund lifestyle expenses. While one could argue that this is harmless if the balance is consistently paid, a recent survey by Bankrate suggests that the average person carries forward a balance just shy of $5,000. This amounts to over $1,100 annually in average estimated interest charges. This is to say nothing at all about the exploitation of the powerful human tendency to spend tomorrow’s money as if it were easy to come by. After all, if credit cards were such a great deal for consumers, why are we showered with freebies to use them?
Once a person gets used to a certain lifestyle, it is tough to put the genie back in the bottle. But back in the bottle he must go if you’re serious about taking control of your wealth. Your most important asset is your ability to earn an income, and any claim against your future income is detrimental to your financial wellbeing. This is especially true when it comes to high interest non-housing debt, which also recently hit a record high of $4.71T.
Understand that you are spending more money than you would otherwise by using a credit card, even if you pay it off every month. Those “points” are not worth it in the end. A wise consumer is one who favors thrift over convenience. As the default “I’ll think about it later” pay option, I see little to no logical reason to rely on credit to fund lifestyle expenses. Think about your expenses now, in the present, while the memory of your toil for income is still fresh. If you can’t bank roll it, then don’t buy it. This is as preachy as I’m going to get on the use of credit cards. That’s Dave Ramsey at his finest and no one shames better than he.
Both personally and in business, I exclusively use debit cards linked to checking accounts that I minimally fund weekly and monthly. If I swipe the card and it gets declined, this feedback tells me that either I budgeted incorrectly or something unauthorized is going on in my account. Either way, I am forced to investigate and reconcile my current accounting. At no point do I rely on my future income to fund my present daily expenses. You can easily set your bank account to decline debit transactions that exceed your balance by declining overdraft “protection”. I only put “protection” in quotes because it’s obviously a predatory revenue source and in no way protects the consumer.
There is nothing wrong with investing in your quality of life so long as the expense does not compromise your future financial security. A great litmus test for determining whether you are undermining your future financial security is a growing airline miles balance. While I shout this advice into the wind on top of a mountain, most will ignore the caution and dive headlong into an ocean of debt under the siren’s call promising irresistible freebies. If this trend continues, it will only add to the building concerns that a recession is nigh.
*Source: U.S. Bureau of Labor Statistics
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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