Debt Fire and Savings Water
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There exists a great deal of debt among individuals in the United States. Are you tired of hearing this mantra from the financial pundits and talking heads? Let’s beat the dead horse just one more time, though, and take a look at the debt graphic below from the Federal Reserve Bank of New York’s November 2012 quarterly report.
While the report paints a picture of improvement as far as home mortgage debt is concerned, 3.2 trillion dollars’ worth of student & auto loans, credit cards, and home-equity lines still outstanding seems hardly deserving of a pat on the back. In fact, with the systemic economic and national security risks exacerbated by this large number, we consumers deserve the greatest reprimand, and yet we still offer the best potential solution to reversing this threatening trend.
The idea of saving as a way out of this debt seems at first glance like an oxymoron – even more so when considered on an individual basis. How do you put out a fire by pouring water into glasses? Because so many of us have become attuned to the borrow/spend/get bailed out cycle, this picture is difficult to grasp. Without going into a litany of ills produced by significant personal debt, here are 3 reasons why the individual savings process is an ideal cure for this cycle.
First, by saving you are reversing the mental cycle of spending what you don’t have. The allure of the debt fire is deceiving because it burns in a field of dry tinder – sooner or later it will spread (consuming more credit), and surround you (bankruptcy) as it feeds on the oxygen you give it (mental cycle). Whether you have accumulated debt by necessity or personal gratification, paying off a numerical amount is only a partial solution to the root problem. Savings is a great way to rehabilitate your mentality from accepting debt as a modus operandi to viewing it as a financial tick to be observed, removed, and subsequently avoided. By setting aside money that would simply sit in a high-interest savings account (or a shoebox, considering today’s savings account rates), you are training your mind to live and let a surplus be.
Reduces Questionable Purchases
Secondly, cultivating a savings mentality will raise elementary questions about your current spending habits. What products, foods, clothes, and hobbies have slipped their way into the non-negotiable category in your mind? Are you spending more on something that doesn’t actually contribute anything (meaningful) to your lifestyle? Thinking about the tradeoffs you are making with certain purchases can be convicting when you have a savings fund waiting to be fed – and even more so when that savings fund is marked with long(er) term goals (like paying off the last of your loans!). If you are in undergraduate or graduate studies, this process is even more crucial in establishing habits early.
Compounding Wealth Erodes Debt
Lastly, it is definitely easier to rack up debt as interest mounts, and to procrastinate paying it off until a later date. On the other hand, once a savings process is started, it becomes easier to increase wealth with compounding interest on savings accounts. Obviously, the savings steps are much slower going than the debt dash, especially when those savings accounts aren’t paying nearly as much as the interest rates your loans are charging. However, by depositing money into one of those accounts, you are taking a small, yet purposeful step forward, making it more difficult to backtrack on a whim. Little savings deposits are like pouring water into the metaphorical glasses mentioned earlier. Those filled glasses will help you stabilize and control the fire as it seeks to spread in different places – each glass of water acts as a shield against greater debt, until you are able to make the offensive transition to filling up jugs for the long haul of life.
Without downplaying the seriousness of your debt, it is important to keep in mind that it is but a campfire compared to the forest of national debt ablaze in Washington. That perspective is important because it will buy you the patience and calmness you will need to carry out a long-term repayment strategy without going into panic mode. Starting a savings plan during debt repayment will also help cement the practice into place once your fire is put out, and it will give you breathing room should an emergency happen requiring more funds than you have on hand. Though your fire is comparatively small, the cumulative effect of putting out millions of them is crucial to stemming the debt of the country as a whole.
Events in life are sometimes unpredictable. You could insert any number of unplanned circumstances into the picture and arguably make the above strategy moot; but in the highly probable case that your environment remains relatively consistent, a savings mentality and process is a great way to recognize, control, and extinguish your debt over a period of time. So start filling those glasses!
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