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Debt Fire and Savings Water

This is a guest article by Patrick from Deposit Accounts.  If you are interested in contributing to Debt RoundUp, please follow our guidelines.

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.

american debt

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.

Mentality Rehab

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!

Image courtesy of FreeDigitalPhotos.net


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16 comments
DC @ Young Adult Money says April 16

“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. ” Love this quote! It certainly is discouraging when people are forced to deal with their debt but our government argues constantly about raising the debt ceiling.

Reply
    Grayson says April 16

    I wish we had a debt ceiling on our debt. I never get my ceiling raised.

    Reply
      The Happy Homeowner says April 16

      Haha..I’m in agreement with this one! 🙂

      Reply
        Grayson says April 16

        Thanks. There are quite a few times I wish I had the ability to raise my debt ceiling and not have to pay it off.

        Reply
Greg@ClubThrifty says April 16

“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). ” Love this imagery! Right on!

Reply
Pauline says April 16

Like any hard situation, it is easy to bury your head in the sand and pretend nothing is going on but it won’t make anything better. Taking just one step in the right direction can make you gain momentum and progress.

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    Grayson says April 16

    So true Pauline. Burying your head is much pH easier, but won’t get you anywhere.

    Reply
    The Happy Homeowner says April 16

    Amen! I buried my head in the sand for years, and thankfully pulled it out & got my financial act together. Apathy and inaction have no place in sound management of our finances.

    Reply
      Grayson says April 16

      I buried my head for a few years and when I finally took it out of the sand, I was in big trouble.

      Reply
John S @ Frugal Rules says April 16

“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.” Great point and one that many miss. Getting out of debt requires a paradigm shift and moving to being a saver is vital to that process.

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    Grayson says April 16

    Becoming a saver is a hard change when coming from being a spender.

    Reply
Justin says April 16

I love the imagery used in this post. Debt is definitely like a fire in a dried up forest. You can burn through your credit quickly and end up with nothing but ashes, that need to be paid back.

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    Grayson says April 16

    I liked this as well. What a way to put this into imagery.

    Reply
CashRebel says April 19

Great metaphor. It’s truly a vicious problem that the average consumer has not decided to deal with. I feel so much more secure now that I have savings at the ready in case something unexpected happens.

Reply
    Grayson says April 19

    I feel much better that I have saving in my hand as well. There is no better feeling than knowing you are somewhat prepared.

    Reply
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