Are you an optimistic spender?
Does this scenario resonate with you?
It’s Wednesday. You get paid on Friday. You find yourself a little light on cash, but you’re at a “Sale of a Lifetime” and find something that’s just too good of a deal to pass up. So, you buy it with your credit card, and vow to pay it off by Friday. Month’s end at the absolute latest!
Maybe the details are different, but at the heart of this scenario is a million-dollar question. How you answer this can easily determine your financial future.
Do you spend money before it’s in your bank account?
Never (Defined as NEVER)
Sometimes (1-3 times per year)
Often (3+ times per year)
If you answered Never, you don’t have credit card debt, and you have not fallen prey to this destroyer of wealth, which is a miracle in our “have it now society!” Keep up the great work and go get that freedom.
If you answered Sometimes, I’m guessing you have a few thousand in credit card debt, and it kind of just lingers. No matter how much money you throw at it it, you just can’t shake it.
If you answered Often, I’m guessing you have $7,000 + of credit card debt. You can’t remember when you didn’t have credit card debt, and it feels like it’s impossible to be debt-free because you just don’t make enough to get ahead.
Fear not, my lovelies! The situation can be rectified by simply rooting out Optimistic spending from your thinking. (Optimistic spending is spending money, even one penny, before it’s in your bank account.)
Let me show why this thought is so deadly to financial freedom. First, the future is unknown. It will have unexpected events. Actually it’s guaranteed to have unexpected events. Some of those events will bring rainbows and some will bring the rain. That’s Life. Life events won’t destroy your freedom, but if you add a debt to your future (defined as putting something on your credit card today that you don’t have the cash in hand to pay for), what you’ve done is created a debt and threw it into your future. This makes the future twice as difficult to navigate. Not only does it hold the unknown, it now holds a guaranteed debt. If the thought of optimistic spending really resonates with you, and you often pre-spend your income, your future becomes littered with debt. Do you see how this could easily steal your freedom?
So, why do we fall for this trap? Because it’s deceiving. On the surface it doesn’t look like that big of a deal to spend “a little money” when you know you’re getting paid on Friday. But in reality it is much harder to pay back than we anticipate. This part, this perception, is what makes the slope so slippery and difficult to get out of. Let me show you what I mean.
Imagine you earn $4,000 a month, which you spend, and you put a $1,000 plane ticket on a credit card, that you vowed to pay off by next month, bringing your total monthly spending to $5,000.
Month 1 spending
$4,000 paycheck + $1,000 on credit = $5,000 total spent, or 125% of income
To make your vow a reality, the following month you would only be able to spend $3,000 of your take-home pay. (This is a 40% decrease in spending!) In month one you spent 125% of your income. In order to pay the credit card, in full, in month two you only can spend 75% of your income. It would be like saying you’re going to start saving 25% of your entire income, starting immediately, when your savings rate the month before was less than zero. This is the financial equivalent of crash dieting.
Lastly, and perhaps the most influential reason why this thought is so deadly to your future fortune, is that fortunes are not created by your earning power. The taxes are too high, and it takes too long to earn the money. Fortunes are built through investing. You could define investing as: giving up a little today for the possibility of more tomorrow. This is exactly the opposite way of thinking when compared to the optimistic spender.
Investor: I give up a little today for the possibility of more tomorrow.
Optimistic spender: I want it today. I will pay more and give up something in the future.
Remember: Wealth is a thinking game. If you want to be richer, all you have to do is think differently.