Sunday Vibes

MONEY THOUGHTS: Beguiling credit traps

AS we grow from childhood to adulthood and then on through the decades of advancing maturity, we owe it to ourselves to learn basic money mechanics.

Here's a fun stage-setting question for you: Is it easier to dig a deep hole or erect a tall tower?

Think about it as I share a personal story:

About 30 years ago when I began the Malaysian leg of my career — after working in the UK and the US for part of the 1980s — my friends and I would compare the credit cards we had secured from our banks.

Even as young adults we knew it would be crass to compare bank balances. But we had no compunctions about discussing the credit limits granted to us on those status-affirming plastic rectangles.

My halcyon days of vigour and youth in the early 1990s, when Malaysia's annual gross domestic product (GDP) grew at eight or nine per cent, are now in the distant past. Yet I still remember that whenever I learnt I had a (slightly) higher aggregate credit limit than one of my friends, I would — quite irrationally — feel richer than him. (Such discussions were always with other guys, never with ladies; I wonder why.)

But each time I learnt I had a lower limit than someone else, I felt economically inferior.

Today, from the much creakier and marginally wiser perspective of a greying 57-year-old reminiscing about his ebony-haired 27-year-old self, I often sigh and chuckle.

The sighs are for the destructive rabbit holes I went down too many times to remember because of a fundamental flaw in my thinking caused not by an inability to mathematically compute interest charges — which I can do in my sleep — but rather by a disconnect between one part of my brain that accurately calculates the cost of not paying off a credit card balance in full (or even using an overdraft (OD) from the bank) before interest charges kick in, and another part of my vital grey matter that (incorrectly) tells me a pair lies:

1. Delaying full payments when I have the money to make them is justified because it's always better to keep the cash in my own bank account; and

2. Buying an item on credit because I don't have enough cash to pay for it outright is almost always justified because "I deserve it"!

TWIN LIES

The first lie is mathematically illogical (and potentially impoverishing) because the cost of a revolving line of credit — be it an OD or unpaid credit card balance — is always more (often two to 10 times higher) than the cash-yield earned on bank deposits.

The second lie stems from unwise expectations we osmotically absorb from friends, advertisements, commercials, culture and society.

The lies revolve around the way our brains perceive what we can get and what we might lose. In Jason Zweig's excellent book Your Money & Your Brain — How the New Science of Neuroeconomics Can Help Make Your Rich, he writes: "Because gains and losses have so much emotional power in the present, but fade when they are delayed into the future, we suffer chronic confusion between the price of buying something and the cost of owning it."

I believe Zweig's observation is why those twin lies our brains tell us often result in our spending hundreds of thousands, sometimes millions, of ringgit in aggregate interest charges and late fees over the course of an otherwise productive working lifespan.

Zweig goes on: "We are very sensitive to the former because it is now, and much less sensitive to the latter because it is later."

In contrast, if we hypothetically opted to use only debit cards that force us to wait, save up our own money, and then spend a portion of our personal savings, we would — over the course of long money-generating careers — accomplish four counter-cultural feats:

1. Initially spend less on ourselves in our youth;

2. Waste no money at all on interest paid out to financial institutions (or to dreaded loan sharks, if we mess up);

3. Earn interest or profits on extra savings and investments we're able to accumulate because of our ability to delay gratification; and

4. Later in life spend much, much more on ourselves because we would have wisely built personal wealth over decades instead of slavishly contributing to already bloated corporate coffers.

START AFRESH

Most of you reading this have committed some mistakes with revolving credit instruments that are cleverly designed to keep the vast majority of every country's middle class trapped in mediocrity.

But there is always an opportunity for us to start afresh regardless of how old (or young) we may be. That's the essence of hope found in sound financial planning lessons.

(For a deeper dive into similar financial principles, you're welcome to access both my free and premium resources at https://learn.rajendevadason.com)

In the next four weeks, we'll take a sequential look at those four listed feats. Till then, do whip out your pen and some blank paper to calculate how much you spend (waste?) a year on interest payments on all your debts and how much you earn as yields on your savings and investments.

I suspect what you discover may disturb you because the answer to my opening question is: "Dig a deep hole".

© 2021 Rajen Devadason

Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on Clubhouse (Rajen Devadason).

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