Debt works like a house of cards or a pyramid scheme.
You spend $1 that you don’t have today with the hope that you’ll earn $2 tomorrow. You can pay back the $1 you borrowed and still spend $1. But if you want to spend another $1 (that you don’t already have) you’ll have to earn $3 the next day.
Now you owe $2, so you’ll need $4, and so on.
Eventually, the whole system will collapse as you get to the point where you simply cannot earn enough additional money to feed your spending habits. At that point you stop buying new things and start paying down old debts. The economy stops growing since you are not pumping more money into it.
If everyone in the country stopped spending money they did not have, our economy would go through a radical correction. Jobs would be lost, industries would fail, high end retailers would go bankrupt, and so forth. Of course the end result would be a new economy, based on actual cash flows—a bigger, stronger, and more stable economy. It would take several years to achieve this new economy.
But, since nobody wants to deal with that much pain, it’s not going to happen. However, you can correct your own personal economy by stopping the debt cycle for yourself without going through a catastrophic nationwide economic recovery. It’s the best of both worlds.
And as your friends are driving their leased cars, wearing clothes paid for with borrowed money, and eating dinners they can’t really afford, you’ll realize that their entire lifestyle is rented, while yours is owned. When their lease is up (so to speak) they will be left with nothing. When the economy takes a downturn or their job gets downsized they will lose absolutely everything—and all the pride that went along with it.
Lucky for them they have a good, stable friend who understands the difference between illusion and reality: a friend who only spends money after they earn it and puts a little back. A friend who will give up a spare bedroom until they can find a new job. And a friend who will read them some of these articles.
Are you in debt? Find a lower interest rate.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com.