The History of Credit Cards and Consumer Debt

The History of Credit Cards and Consumer Debt

Where did this modern epidemic of what I call the “Plastic Plague” come from? Most of us have been taught that buying things on credit is not only normal, but also the smartest way to purchase. We think we have to pay for everything with a credit card so we can rack up as many rewards points as possible and improve our credit score. We have been taught to maintain a mortgage even if we have enough money to pay it off so we can deduct the interest off of our taxes. Lending institutions have done a great job convincing us that what is in their best interest is also in our best interest. What is the origin of our current society’s attitudes towards debt? What did we do before car loans existed? Did you know that Henry Ford believed as a matter of principle that no one should ever buy a car on credit? He invented major breakthroughs in production efficiency to drive costs down so his automobiles would be more affordable to the middle class, but he still expected everyone to pay cash. No other manufacturer could quite compete with the very inexpensive Model T Ford until 1919 when General Motors formed its own lending institution, General Motors Acceptance Corporation (GMAC). This innovation allowed average people to buy GM’s higher-priced, more luxurious automobiles with lower payments over time. By 1926 three-fourths of all car sales in America were financed.[i] Sticking to his principles, Henry Ford fought this movement as long as possible, and thus suffered a dramatic decline in sales. In 1927 Ford Motor Company was finally...
How to Channel Cash Flow To Reach Your Financial Goals

How to Channel Cash Flow To Reach Your Financial Goals

Have you noticed that whenever we receive money, it somehow always seems to magically flow through our fingers like sand flowing through an hourglass? It is very difficult to hang onto. Perhaps this is why in the financial services industry we call it “cash flow.” Most people put much less thought into where their money is going than into what they will do this weekend or where they will go on their next vacation. Then they wonder why they never seem to be able to get ahead financially. Before the money arrives, we must set up financial dikes and ditches—strict financial priorities, rules, and boundaries for ourselves—so our money will be used for the things that are most important to us. Yes, work is required, but the reward is well worth the effort. Once we decide where we want our money to go, we need to make the flow as automatic as possible to be sure it consistently goes to the right places. I am a huge fan of direct deposits and automatic withdrawals, not only because they are less work, but also because they make the discipline of regular saving and investing much easier. It is psychologically much less painful than having to decide every month to write a check to a savings or investment account. Properly channeling our cash flow is easier said than done. As mentioned in other articles, successful money management is not so much about math as it is about personal discipline, sacrifice, and having a clear vision of what we want to accomplish. It has much more to do with emotions and behavior than...
Pay Off Debt or Invest For the Future?

Pay Off Debt or Invest For the Future?

Often people ask me whether they should pay off all debts before saving for the future or save first in hopes of earning a higher return on investments than they are paying in interest on debts. This is an age-old debate, and I have heard convincing arguments from Financial Advisors on both sides. The “Pay Off Debt” Argument Some advisors recommend that we liquidate all of our savings and investments except a very small amount, even as low as $1,000, to immediately pay down as much debt as possible. Then they recommend that we use every discretionary penny from each paycheck to eliminate the remaining debts as quickly as possible. After we are completely debt-free, then we can start saving and investing for the future. I admire people who are disciplined enough to follow this extremely aggressive strategy, but it is risky because it does not leave an adequate safety cushion. A $1,000 savings account would not be enough to cover unemployment, major unexpected expenses, or serious extended illness. What would happen to my house if I could not make my mortgage payment for six months due to unemployment? Would the bank cut me any slack because I had been paying them extra for the past year in hopes of paying my mortgage off sooner? Not likely. We should always maintain at least three to six months of living expenses in liquid savings, even if we have debt. The “Invest it All” Argument On the other extreme, some people recommend borrowing as much as the banks will allow and investing it all because they declare we can make more...
What Is the Biggest Threat to Financial Security?

What Is the Biggest Threat to Financial Security?

One especially curious phenomenon deeply impacts the financial decisions we make. We are all affected by it. No one is immune to it, including myself. It is commonly known as “keeping up with the Joneses.” The Danger of Comparison We enter dangerous ground when we care more about what others think of us than we care about doing what is right for ourselves and our families. This is a slippery slope that can ruin us financially because we can never be completely satisfied that we are impressing everyone around us. We will always be able to find someone who has more and better things than we do. The sad news is that even if we spend every last penny to impress others, most of the people we are trying to impress may never even notice. Most people do not care about our image as much as we think they do. Think about it. How much time do you spend thinking about how idiotic someone is because they drive a junky old car or how awesome another person is because they live in a mansion? If you notice at all, I suspect you may give it a fleeting thought for a few seconds, and then you move on to focus on what you are trying to accomplish. No one is really paying much attention to our possessions. They are all too busy worrying about themselves. If we do have friends who make fun of us for not buying all the expensive toys they have, maybe we shouldn’t hang out with them so much. Many reckless spenders poke at frugal people...
More Money, More Stuff? Don’t Count on More Happiness

More Money, More Stuff? Don’t Count on More Happiness

By Carl Richards What is the one thing that, if you could just get your hands on it, would make you much happier? Go ahead. Get out a piece of paper and write down the first thing that pops into your head. Got it? O.K., now fess up. Who wrote something about a new car? How about a promotion? A bigger house? A raise? A yacht? But if you wrote down almost anything at all (except a wish for deeper and more long-lasting relationships), you’re probably wrong. It turns out that happiness doesn’t come from more money, more stuff or even big life events like getting a raise or landing that dream job. A study from the 1970s by Philip Brickman, Dan Coates and Ronnie Janoff-Bulman for the Journal of Personality and Social Psychology even found that lottery winners took less satisfaction than nonlottery winners in everyday events, and in general, they were not any happier than those who didn’t win the lottery. If winning the lottery doesn’t bring happiness, how likely is it that a new boat will? Not long after my wife and I married, we were walking around in a Salt Lake City park, superexcited to be newlyweds and with big dreams about the future. We started talking about money. While I can’t recall the exact number, I do remember saying something like, “If I can just make X dollars, we’ll be so much happier.” It seems so shallow to think that some thing or number will make me happier. But then I realize how often I have heard others say it, too. Even more common...