The credit crunch
I want it all and I want it now. That seems to be the catch phrase of the current generation. We want it now, on credit, pay later, worry about it tomorrow. Unfortunately when tomorrow comes it arrives with a whole lot of headaches.
Do you have money just waiting to be spent?
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In the 1980s we came to believe that greed is good. That anything can be bought now and paid for later. We lived in a sea of credit and not even the stock market crash of 1987 could dampen our spending habits. Have we forgotten the importance of saving? Is this a skill we no longer desire, a skill that we no longer pass on to our children?
One problem is that the banks encourage us to spend money that we don't have. If you use your credit card on a regular basis and always pay the minimum monthly amount, what is your reward? Reduced fees? Lower interest rates? More time to repay? No. What you get is an increased credit limit so you can spend even more money that you don't have.
The problem boils down to this. Once you start using credit cards and hire purchase there is very little incentive to stop. Let me explain. If you bought something on the credit card it may take you five months to pay it off. After that five months is up most people will then be looking at their next purchase rather than spending another five months saving for it.
In our quick fix instant gratification society there simply isn't any immediate results from saving. Saving is a slow process that will benefit you over months and years. The irony of the situation is that both the saver and the credit card user will be buying items at roughly the same rate. The difference is that the credit card user will be paying a lot more.
There really is no need to have anything owing on your credit card. If you do have then you will be paying dearly for it. As you can see from the graph below consumer credit has risen dramatically in the last few years as borrowing has become easier.
It's not just credit cards that cause problems, as we have seen with the subprime fiasco mortgages can also be risky. The subprime issue occurred when banks lent money to higher risk individuals who were barely able to meet the repayments. Once the interest rates rose there were a significant number who could not pay resulting in foreclosures. This in turn led to a number of banks collapsing. So who was to blame? Both parties ultimately led to the problem. Banks were too willing to lend money to higher risk individuals while the prospective home owners were too eager to sign on the dotted line to get their new house.
So how do we break the cycle? It all comes down to self control. Are you able to hold off on that expensive item until you have the money? If you are then you are financially more responsible then a significant portion of the population.
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