Societal ills and math (the generation of NOW)
Hi all,
I think we live in a generation of Now. Everybody wants what they want, and they want it right away. They don't understand the consequences of having things before they can afford them. I'm in this category. I see a great deal, a must have item, and I get sold by the consumerism. I really need this fast computer. I don't just want it. I need it with the burning passion of several suns. It will save me time, money and make me happier. Of course it will.
Few people stop to do the math however - if you buy something awesome but have to buy it on credit at 17%, you end up paying far more for the privilege of NOW. Here's a quick example:
I want a computer that costs $1399. It has to be the fancy mac one. You know, because it's shiny and everybody else has one. I can't afford to pay for it now, so I put down the 399 I have and have to finance 1000 at 17%. I'll do a quick breakdown of how much it would cost for 4 years, using Pe^(rt) to calculate the compound interest.
1000e^(.17*1) = 1185.30 after a year
1404.94 after 2 years
1665.29 after 3 years
1973.88 after 4 years
As you can see, wanting it before we can afford it costs a premium. After just 4 years of compound interest, we've paid an extra 1000 for the product.
It was a lot simpler before credit and credit cards. People bought what they could afford, and didn't buy what they couldn't. The only things they financed were houses and cars usually, and not even them in many cases. The harsh reality, which has led to so many of my generation and the subsequent one to move in with mom and dad, is that it's easy to get in over your head.
I used to be the kind of guy who paid his credit card in full every month. Then I got married, spent way too much on the wedding, a new house, repairs for said house, college diploma for my ex, braces, 3 new cars, etc. It's a hole I dug for myself, and I am having a hard time digging myself out, even 3 years later. I have a lot of assets now, but even after borrowing against them I'm not able to pay off the credit cards in full again. I am tightening the belt financially, buying only necessities and trying to be as streamlined as possible. However, it's hard to rein back in. Simply doing the math really helps though.
In short, realizing that the debt will be a lead weight on my financial future brings me back to reality. Just because I CAN spend to my credit limit every month doesn't mean that I should. In fact, with 2 cards, I can spend 34k that isn't mine. Every month. That's almost half my yearly salary that I have to use. Why would companies lend so much with reckless abandon? Because they want me right where I am. Paying them 17% and 11% for the privilege. It's not "good debt" like a house. It's the kind that will turn into no assets in my future. It was used to buy things that won't retain their value. Dinners out, computers that lose value quickly because they get old, appliances that will break, gasoline for the cars. There's no governor on this financial engine. At full throttle, it can bankrupt a person, and along the way there are incentives for using it that way. You get the new, shiny thing and it doesn't even feel like you're spending your money. It's free! Just swipe the card and it's all yours.
At any rate, it's easy to spend money that isn't yours. Except that in the long haul, it is. It gets reflected in financial opportunities that you miss out on. It keeps you from saving for retirement or bettering your life because you're paying for things that you bought several years ago. In fact, you're paying triple or quadruple the amount because you had to have it before you could afford it.
Anyway, that's my two cents. I wish I hadn't spent both of them.
~Mark
I think we live in a generation of Now. Everybody wants what they want, and they want it right away. They don't understand the consequences of having things before they can afford them. I'm in this category. I see a great deal, a must have item, and I get sold by the consumerism. I really need this fast computer. I don't just want it. I need it with the burning passion of several suns. It will save me time, money and make me happier. Of course it will.
Few people stop to do the math however - if you buy something awesome but have to buy it on credit at 17%, you end up paying far more for the privilege of NOW. Here's a quick example:
I want a computer that costs $1399. It has to be the fancy mac one. You know, because it's shiny and everybody else has one. I can't afford to pay for it now, so I put down the 399 I have and have to finance 1000 at 17%. I'll do a quick breakdown of how much it would cost for 4 years, using Pe^(rt) to calculate the compound interest.
1000e^(.17*1) = 1185.30 after a year
1404.94 after 2 years
1665.29 after 3 years
1973.88 after 4 years
As you can see, wanting it before we can afford it costs a premium. After just 4 years of compound interest, we've paid an extra 1000 for the product.
It was a lot simpler before credit and credit cards. People bought what they could afford, and didn't buy what they couldn't. The only things they financed were houses and cars usually, and not even them in many cases. The harsh reality, which has led to so many of my generation and the subsequent one to move in with mom and dad, is that it's easy to get in over your head.
I used to be the kind of guy who paid his credit card in full every month. Then I got married, spent way too much on the wedding, a new house, repairs for said house, college diploma for my ex, braces, 3 new cars, etc. It's a hole I dug for myself, and I am having a hard time digging myself out, even 3 years later. I have a lot of assets now, but even after borrowing against them I'm not able to pay off the credit cards in full again. I am tightening the belt financially, buying only necessities and trying to be as streamlined as possible. However, it's hard to rein back in. Simply doing the math really helps though.
In short, realizing that the debt will be a lead weight on my financial future brings me back to reality. Just because I CAN spend to my credit limit every month doesn't mean that I should. In fact, with 2 cards, I can spend 34k that isn't mine. Every month. That's almost half my yearly salary that I have to use. Why would companies lend so much with reckless abandon? Because they want me right where I am. Paying them 17% and 11% for the privilege. It's not "good debt" like a house. It's the kind that will turn into no assets in my future. It was used to buy things that won't retain their value. Dinners out, computers that lose value quickly because they get old, appliances that will break, gasoline for the cars. There's no governor on this financial engine. At full throttle, it can bankrupt a person, and along the way there are incentives for using it that way. You get the new, shiny thing and it doesn't even feel like you're spending your money. It's free! Just swipe the card and it's all yours.
At any rate, it's easy to spend money that isn't yours. Except that in the long haul, it is. It gets reflected in financial opportunities that you miss out on. It keeps you from saving for retirement or bettering your life because you're paying for things that you bought several years ago. In fact, you're paying triple or quadruple the amount because you had to have it before you could afford it.
Anyway, that's my two cents. I wish I hadn't spent both of them.
~Mark
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