The consumer credit trap and how to avoid it

This morning I found an interesting advertisement from HSBC which said I had won/earned (ganado) 2 percent monthly interest rate on purchases made through the end of October. I was not thrilled.  I probably get an e-mail message each month telling me of different buy now pay later offers for different stores and I keep asking myself "why?"

Why would I want to shop at those stores?
Why would this be in my interest?
Why would I want to pay 2% a month (24% a year!) to go buy stuff this month with my credit card?

Unfortunately many people would see that e-mail and immediately plan to go buy stuff sometime that week.  The problem is that credit cards and any other form of consumer credit is a drug. As humans we get a little excited and happy every time we have something new. It doesn't require a purchase, but shopping is a very easy way to get new stuff.  It is also unfortunate that this happiness is very temporary. Typically from a few seconds to a month. After that it is either consumed or gets put in a pile of other stuff. Eventually we need to buy containers to store our stuff in and find somewhere to put it all. That's probably why the bigger the house, the more stuff we have and the more stuff we have the bigger the house we "need".  Since housing is a huge fixed expense, just having a huge collection of stuff - even free stuff - would have a large financial burden. You'd need an extra bedroom and a garage just to store it all.

What about the credit card balance? First of all you will now have to pay it. If you are late on a payment or miss a payment you'll pay a large fee. Additionally you'll be paying 24% each year this month's purchases that you didn't even need.

You'll need to consider the opportunity cost of your consumption. Consumption is a bad word. The cost of the goods you buy plus interest plus the occasional late fee plus storage cost is huge. Say I went out and bought a new wardrobe up to my current $3500 peso limit. Those clothes are not going to generate income. If I already have sufficient clothing it was a waste of money. I could have just bought what I need and could pay off at the end of the month without paying interest.   It would be great to have another pair of trousers and a dress shirt, but I don't need to spend more than 900 pesos perhaps less if I go to a store like Walmart or Soriana. I probably won't even buy those. I don't really need to buy a shirt. I could just buy trousers with cash or using credit and pay my card off in full at the end of the month.

Instead of spending $3500, I could spend 400 pesos for what I could really use and assuming I actually had $3100 pesos available, I could invest it in stocks, bonds, or CETES (T-bill equivalent). Supposing that I already have met my savings goal for long term needs, I could put the money in the bank to pay for  my vacation!

How can you avoid the consumer credit trap?

• Be aware that banks are not your friends. They want you to owe them money so that you will become a steady source of income for them.
• Be aware that happiness from stuff is only temporary, but its cost is long term in money, interest and fees, and in increased storage and housing.
• Pay yourself first. Set aside money every time you get paid. Some money should be for irregular expenses and some money should be for retirement. The irregular expense money that isn't spent should be put in investments.
• When you see something you like in a store, ask yourself if you really need it and if you have the cash available to pay for it (without taking money from your savings!) Better yet, wait a day or a week before making the purchase.  You'll be surprised how often you feel you absolutely need something one day and the next week you no longer want it.
• Don't carry your credit card(s) with you.  
• Plan your shopping trips. Make a list of the things you need and stick to it.
• Don't go to shopping centers as social events. Go to parks, go for walks,etc. 
• Don't watch television. Those advertisements might make you think you need something.

What to do with all your excess stuff when getting rid of the clutter

In the last post, I wrote about my thoughts on organizing and the importance of getting rid of what you don't need, want nor use.

What should you do with your huge pile of stuff?

Sort it out into new piles and put what can't be recycled in trash bags. Make one pile for things you want to sell. Books, CDs, working electronics, furniture, DVDs, etc could be sold at a garage sale.  Make another pile for things that are usable, but you don't want to bother with them that's your donate pile.

Have a couple garage/yard/sidewalk sales and/or put items for sale online. Whatever doesn't sell in a couple months can be donated. Keep those items away from your organized things. Don't let them back in. You separated them for a reason!

Also consider going to garage and yard sales when you need something, buying used is normally 1/4 of what you'll pay new for something.

Decluttering can save you time and money

I have always been a collector. I remember in elementary school I collected stickers, In junior high, I had my cassette tape collection (yeah I'm showing my age. CDs were expensive when I was in high school! and my first CD Player was stolen at school though I never reported it).  Anyway, although not an extreme pack rat, I know that I've always had the tendency to collect and keep stuff.

I'd always justify keeping something when I'd do my spring cleaning. I'd say, "but I 'm sure I'll use it later." and surprise the next year I'd say the same think even though I never used it all that year.  

I'm trying to improve, but it is hard to go against nature. I really believe that the collecting tendency or desire is genetic like so many other behaviors.  I remember my Mom still had her old record collection in her bedroom.  I can't remember her ever playing them when growing up.

Unfortunately if you have a lot of stuff, you need a house or room big enough to store it all. You also need the storage supplies (shelving, book cases, boxes, etc.) to put everything in. Additionally you need some kind of organizational system and labeling so when you actually need something you know where to find it or your spend hours or even days looking for it. How many middle class family garages are full of storage while the cars are parked on the street? That's serious clutter!

Another thing I've learned about myself over the years is that I'm very much out-of-sight, out-of-mind.  What I mean is that if something is stored in a box or some other container I can't look into without opening, I forget I have it. Perhaps I would have used it sometime during the year, but I didn't because at the time I had forgotten I had it. 

Since I share an apartment, I try to keep most of my stuff in my bedroom. That means that I have my large plastic containers stacked and on top of other things. One container is on top of my file cabinet. Another box is on top of my armoire/wardrobe, and I have two stacks (3 and 2) along the back wall of my room. 

I have my desk, a tall book case, and another piece of furniture (about the size of a dresser but with shelves instead of drawers) for storing stuff.  Most, but not all of my clothes fit in my wardrobe when folded correctly.  My wardrobe isn't very big. I have quite a few small boxes with CDs (games and backups)

When I moved in December 2011, I stared my efforts to remove the clutter. I realized that in just the last few years my collection of stuff had expanded out of control.  I got rid of half my clothes (mostly worn out stuff) and at least half of my books. 

I was quite proud of myself to have gotten rid of all that, but I still needed to rent a moving truck mostly for boxes of stuff. I really don't have that much furniture.

Now, only a few months later, I got the bug to remove more clutter. I guess you'd say that my clutter is pretty normal, but I'm in a small space so my room always looks like a mess.  

This weekend I went through my file cabinet and got rid of some papers and at least one small box worth (probably 2) of stuff. There was an old wireless router, a bunch of cables, wires and adapters for only God knows what, and misc. stuff that I'll never use again like two checkbook holders. I haven't had checks for at least 5 years, but I brought the holders with me on the last two moves. No, they don't take up much room, but you could say that about a lot of stuff. Believe me, I've used that same excuse many times.

I then went on to boxes of stuff. In my CD boxes I found many old software application install CDs for some very old versions. I'll never use those again. The shoe box I keep them in was almost full. Now it is half empty!

One of my large plastic containers had my extra hanging folders for my file cabinet.  With the extra room I got by throwing out the junk from the file cabinet, I found the space to keep the extra folder boxes in one of the drawers. Now that large plastic container is empty.

I found quite a few books that were out-of-date or warn out. They'll go in the trash if I can't find a way to recycle them.  I decided to keep almost half of my books and now they are all on ONE shelf of my book case.  Just last year they would have taken almost the entire bookcase. 

I later went through my other boxes and shelves. I didn't do a 100% job, perhaps next weekend I'll finish, but I was able to put some tote bags of stuff that were on the floor on a shelf that was completely packed and disorganized. 

I've rediscovered a few binders and notebooks that were almost unused or had stuff I don't want anymore so I got rid of what they contained. I just need to decide if I want to keep or give away the binders. Just a year or two ago I went to the store to buy a binder because I thought I didn't have any! 

How does this incredibly long post relate to early retirement and financial independence?  Well, if I had remembered that I had binders with junk in a box I could have saved the time and money I had spent on a new one. 

Additionally, things that are improperly stored are more likely to wear out or break. Of course if things are packed away you lose time trying to find them if you even remember you had them at all. Time is money. If you are efficient, you get more done!

Most importantly, the less stuff you have, the less space you require to live. That means you could live in a smaller house or smaller apartment or share an apartment before all your clutter took up the extra room.  If you want to go really extreme, share your bedroom with a friend that you can trust.  The cost of bunk beds or a loft for one or both beds will probably be less than what you save in two months. Rent is the largest fixed monthly expense for most people. Save a lot of money by downsizing to a smaller home and put that money toward saving and debt reduction.

Even if you prefer living alone in a one bedroom apartment, you'll save more on moving costs (smaller truck), and you'll save time packing and unpacking.