We aren’t predicting a recession tomorrow. But after such a long “Bull” run there’s bound to be a downturn sooner or later, and now is the best time to prepare your financial life so that you don’t get turned upside down or inside out when it happens.
Even a mild recession could cause a lot of pain for people with credit card debt. The next recession may not be as extreme as the one that occurred in 2007-2008, but it doesn’t have to be in order for credit card delinquencies to become a significant problem.
Even now, amid a record 10-year economic expansion, most people are doing well, but some are living close to the financial edge and delinquencies are ticking up.
What does your current and future financial picture look like? Just 35% of Americans have enough savings to cover three months’ expenses, and 28% have no emergency savings at all. Additionally, 39 million U.S. adults have been carrying credit card debt for at least two years, and another 8 million can’t recall how long they’ve been in debt. About one fourth of people who have debt expect to die before they can pay it off.
All of this despite an extraordinarily low unemployment rate of 3.7%. Makes you wonder what will happen if the unemployment rate goes back up to a more traditional 5-6% rate.
If you listen to the financial gurus on the TV and internet their top tip for paying off a credit card balance is to get a 0% balance transfer card, which lets you transfer your existing high-rate credit card debt to a new card with no interest for up to 21 months. They say that depending on how much you owe, a balance transfer could save you hundreds, maybe even thousands of dollars.
The second top tip is to get a personal loan and use that to pay off the credit cards. Rates aren’t zero, but they are as low as the mid-single digits if you have good credit. The financial gurus suggest personal loans are a useful way to consolidate debt and lower your interest rate.
The major issue with both of these two “Top Tips” is spending habits.
If you haven’t changed your spending habits and you pay off your credit cards, you’ll have an open credit line. And that open credit line is tempting to use, potentially running up more significant debt. If you do that, you still have to pay the “old” debt that you transferred to the 0% card or the personal loan. So instead of taking a positive step forward, you have just taken a huge leap in the wrong direction.
It’s time for an attitude adjustment! Think about why you are spending money and how you are spending it. Are you trying to buy happiness? If you are buying things to make you feel better, what is it about your life that you don’t like? If you can focus and change the parts of your life that you’re not happy with, will that eliminate the spending sprees?
Another approach would be to think about the way you spend. It is much harder to spend using cash rather than credit. Carrying cash in your wallet means there is a limit to how much you can spend. Using credit means not really spending the money till the payment is due. Studies have shown that people spend about one third more when using credit rather than cash. Maybe it’s time to leave the credit cards home when you go to the mall.
Here is another approach. Review each of the purchases you made on your last credit card bill. Evaluate each, one rating it from 1-5. Did the purchase make you happy? With 1 being the happiest. We’re not talking about happiest at the point of purchase. We’re talking about happiest today during your review. You need to seriously think about any purchase that scored 3-5. What can you do to make all purchases score a 1 or 2 on the happy meter, even weeks after the initial purchase?
Do you live from a perspective of scarcity or abundance? Most people live from a scarcity mentality, thinking there is never enough. The focus is that we might not have enough. We might suffer from the lack of something.
Take a moment to think about what things would look like if you lived from an abundance mentality. First, thought is that you already have enough and you don’t need more. The quest to buy happiness disappears.
In Paul’s first letter to Timothy he said “For we brought nothing into the world, just as we shall not be able to take anything out of it. If we have food and clothing, we shall be content with that”
Nothing has changed in the past 2000 years. We still enter the world with nothing. We still can’t take anything with us when we die.
You can be prepared for the next recession if you focus on getting out of debt and stop spending in an effort to buy happiness.