Credit card debt is one of the most damaging factors in your wealth creation journey.
This week we continue to explore the impact of mindset on your ability to create wealth by looking at a one component of money management… credit card debt.
Money management is a topic that has relevance to many aspects of your wealth creation. It is important when investing in the stock market, it is important when determining how much to invest in the property market.
But it is potentially more important when considering how you manage the money that you currently have…
The First Step
The first step to becoming wealthy starts in being able to retain more of what you currently earn.
Most people overlook the importance of this step. It is the ‘have-it-now’ mentality.
An extension of the ‘have-it-now’ mentality is the ‘get rich quick’ mindset that is encouraged by modern society. Just have a look around you at the number of lottery opportunities that are available every week.
Sadly, a large number of people have a lottery win as their sole wealth strategy, believing it is the only way it can be for them.
In the book ‘The Millionaire Next Door’, Thomas Stanley explains that 80% of millionaires are first generation millionaires. That means that it is absolutely possible for you to start from nothing and create wealth.
So let’s look at one of the modern habits that is killing your wealth… credit card debt.
Modern society has conditioned us all to think in terms of instant gratification.
We are not made to think long term. We’re used to instant gratification, which makes it hard to achieve wealth over the long term, where you have to keep yourself on a certain path for 10, 20 or 40 years.
Just look at some examples, if you want news you no longer have to wait for the evening edition, instead it is available on a device that we all carry everywhere we go, every second of the day.
Or movies, they are now downloadable from many different websites almost as soon as they have been released.
We can get almost whatever we want whenever we want it…
This mindset has extended to our wants. If we want something we just buy it, and if we don’t have the cash, we use credit card debt.
You have probably heard of the term ‘retail therapy’. We have this notion that we can make ourselves FEEL good by spending.
Short term gratification is the biggest habit that we all use that prevents us from creating wealth, from achieving financial freedom.
And this is where the wealth creation journey comes unstuck.
Live on Less
The more wealth you want to create in your future, the more you need to accept that you can live on much less today. You don’t need most of the things you buy.
There is a big difference between ‘needs’ and ‘wants’. We need housing to survive, we want the latest technology ie phone or television.
Unfortunately, we have the importance of needs and wants mixed up, and go out of our way to chase wants and then wonder why we can’t achieve wealth.
Our chase for wants leads us to credit card debt, using this modern facility, which I have seen described as the ‘junk food’ of the financial world, to spend money we don’t have on items we don’t need.
It’s debt logic, where we think in terms of paying for things in monthly payments.
The thing about this mindset, is that we know it doesn’t help us.
This is known as ‘cognitive dissonance’ – where we hold two different beliefs in our head, one is about the way we want to behave, and the other that runs counter to that desire.
If we hold two opposing ideas in our minds, we will change our beliefs to match our behaviour and not the other way around.
We know we are doing the wrong thing, yet we keep doing it…
So the solution to this problem is relatively simple – change your behaviour, to change your beliefs. Behave the way you want to believe. Simple right?
How to Avoid Credit Card Debt
The first step to improving your wealth creation outcomes is to avoid credit card debt.
Make a key element of your money management strategy the desire to avoid debt, especially for items that you don’t need or items that don’t result in the purchase of assets.
One way to achieve this behavioural change is to engage a ‘purchase pause’. That is, before buying anything, have a period of time between the decision to buy and the actual purchase.
For minor items it could be a day or a week, for more substantial items it could be a month.
By introducing this delay, you give yourself time to decide whether you actually need the item. Time to recognise that it is likely an impulse purchase.
And you will probably find more often than not, that the desire for the item fades the longer you wait to make the purchase, because you don’t actually need it in the first place.
It will help you to manage the desire to feel good from retail therapy and save you thousands of dollars. Dollars that can be directed toward wealth generating assets and improving your wealth, without having to earn a single extra dollar.
Impulse control is an essential skill to have when it comes to building wealth. You have to be able to resist desires that come up, and recognise that instant gratification isn’t supporting your wealth creation goals.
It has been shown that buying a consumable item with credit card debt can cost you two times your money over time. Buying liabilities, items that continue to cost you more after purchase, will cost more than 4 times your money.
Think about that for a second… what are your impulses really costing you?
So the first step to improving your wealth creation habits is to avoid debt for items that aren’t assets as much as possible, stop using credit card debt and get out of debt as quickly as possible.
If you haven’t already read my report, click the link below to get my free report that includes the formula for wealth. Action is one of the 4 components of the formula.