Blog — Sisters for Financial Independence

“Credit buying is much like being drunk. The buzz happens immediately, and it gives you a lift. The hangover comes the day after.”

I recently came across a post on Facebook about how a woman took out what essentially amounted to be a very expensive loan for underwear. I’ve included the text below and you can find it here too. It’s a public post so hope it’s OK for me to repost. Credit to her for admitting to it. Upon reading it, it got me thinking about my own spending habits and the “loans” I’ve taken out by putting certain items on credit so here goes.

Here’s an excerpt from her post:

That UNDERWEAR sat in a dresser drawer and we made monthly payments we couldn’t afford at over 24% interest. That underwear loan turned into car loans, which turned into furniture loans, which turned into vacations on credit cards, which turned into…

Alcohol and Dining

24% interest rate. Yikes! I can’t judge her for that because I too did a similar thing when I was in my mid-20s. I had a good job, decent pay, was contributing to my retirement accounts, paying off a car, paying for rent, but I was living way over my means. Sooo over my means that I took out cash advances every other weekend or so right before we hit the bars or go to dinner. It was not a proud moment for me and for a few months, I kept doing it. There was always the excuse: “Next week, I’ll stay in, do better, spend less”. Now, I didn’t consider myself an alcoholic, and in hindsight, I’m not really that much of a social butterfly, but at that point in time, going out was the thing to do. It was what was expected. I lived in a town just a stop away from Manhattan in New Jersey so we were already living on New York City prices. Drinks were on average $15 and it was the era of cosmopolitans of “Sex and the City” fame. After all was said and done, the damage came out to be around $10,000 of credit card debt, mostly for alcohol and dining out. I wish I still had some of my credit card statements from then because I’m really curious how much the interest rates on those charges were especially the cash advances which are notorious for being over 20%. It was a heard lesson learned.

How did I get out of that debt? I’ve shared this on here before that a car accident was what help me make the journey towards financial independence. Thankfully I came out of the car accident unscathed (the other driver left the scene), but my car was deemed totaled after it caught on fire. Three things happened with that accident: 1) I received a payout that I put towards that debt, my student loans and invested the rest 2) It took away one thing that I thought was a necessity, the car, which in the end I didn’t really need and was costing me a fortune to just maintain 3) It changed my perspective on a few things. Namely how we don’t need a lot of stuff to be happy. I was just happy to have come away from that accident without any injuries. I started re-assessing what I owned and took on some minimalistic values which ultimately helped me spend less, save more and invest more.

Clothing

The second thing I spent money on was clothing. Like any typical girl, I was taught that shopping could be a solution to anything. Bored? Go shopping. Hearbreak? Go Shopping. I wasn’t by any means a fashionista, but I would always shop the clearance racks and regardless if the item fit well or was my style, if it was on sale, I would buy it. This led to a walk-in closet of clothes that I never wore. Again, thinking about it now, did I really save money? The sale price + the interest rate + the fact that the item never got worn probably meant I lost money in the end. The opportunity cost of that money not getting invested seems staggering in my mind. That must have been thousands of dollars that eventually went to a donation pile or a few hundred hours I had to work extra to pay for the interest rate on those clothing. Another lesson learned.

Full disclosure too that I must have been a Victoria’s Secret junkie at one point too because I still have lots of underwear from them.

Look around. All that clutter used to be money.

Electronics, Makeup and Travel

I am sure there are many other things I could have bought on credit, but thankfully did not. I’m not that much of an early tech adopter so I didn’t spend a lot of money on the latest gadget, but I did spend money to buy a brand new flat screen when I first moved out of my parents home post grad school. Sears had a 0% promotion going on for new purchases so I took advantage and bought myself a nice 42 inch TV. I never paid any interest on it thankfully as I was able to pay it off before the rate kicked in. To date, that TV still works. So I count that as a good financial decision. There were not many of those in my 20s so lets be generous and add that one to the positive side.

I was never a huge makeup person, but I still had my share of purchases. This didn’t make such a dent in my overall purchases, but I do know plenty of other people with Sephora or Ulta credit cards and I know those things can add up quickly. Lastly were my travel expenses. A combination of points and a planned travel savings account (a priority for me) meant I never had to put vacations on credit. Please don’t get me wrong, I still carry a credit card, but the lessons learned in my 20s means I don’t ever carry a balance, ever.

The Danger of Credit

I hesitated to used the word “stupid” in the title of this post, but sometimes we need to have that honest conversation with ourselves about how misguided some of our spending can really be. If we really sit down and think about what we put on our credit cards, would we be happy with what we find? If we sit down and find that we are paying over 15% of interest on a piece of clothing or over 20% interest on our last night out on the town, would we continue to do it? Sure it’s nice to be able to just hand the cashier or the waiter the plastic and not have to think about the amount of the purchase, but if we don’t carefully assess how much we are paying in the long-term, we will always lose out. So I encourage you to get honest with what you put on credit. Is it a want or a need? It can be helpful to review past credit card statements and highlight what was a need or a want. Sometimes, you may find that you barely remember most purchases and if you can’t remember them, then clearly it was an impulse want.

Should you pay off debt or invest? Here’s one take on what you should do.

Going on a cash only diet can help you determine if something is a need or a want.

To Whitney, the original writer of the post, thanks for sharing. I’ve been there and I’m glad for the lesson and the opportunity to move from that cycle.