Last week we listed the ways university student are enticed into using credit cards. This week we will examine the economical impact of those initially small and convenient monthly payments.
If your credit card minimum payment was $10 and you repaid it every month for 15 1/2 years with an accruing interest of 15.9 percent, a $1,000 purchase would end up costing $2,250. Every time you use your credit card to pay for something you risk it being marked up two and a half times the normal sales price. Over time, that $10 T-shirt cost you $22.50!
Whenever you use your credit card, imagine that two and a half times the price of what you are buying will be deducted from your account over the next decade.
Students assume that they can run up a credit card bill because it will be easy to pay it off after they graduate when they get a high paying job. But the larger your debt, the longer it takes to pay off that debt using minimum payments. The average student graduates with about $7,000 in credit card debt. They assume that $7,000 will be easily wiped away with their first high paying job.
Being burdened with $7,000 in credit card debt after graduation costs nearly $20,000 and can stretch nearly forty years to erase with minimum payments. Just when you should be saving and investing that $20,000, growing rich or buying your own home you are stuck with unfinished and unneeded college debt.
Whenever you casually reach for your credit card during college, visualize the choice between having the down payment on owning your own home or making that purchase.
Studies have linked accumulating credit card debt to psychological stress that increases the likelihood of dropping out of school and suicide. Students find themselves ill-equipped to handle the anxiety of mounting collection agencies alongside their course of studies.
Studies have also shown that a college degree is worth over a million dollars in increased lifetime earnings. Don't sacrifice the million dollar benefits of an education on the frivolous purchases of a credit card.
Every time you reach for a credit card image that credit card hanging on your wall instead of your diploma. It could cost you a million dollars to frame it.
The years after college and before children are the best time in your life to save. But you lose time and squander your resources if you enter the marketplace with credit card debt.
Your high school and college years are the prime years for funding your Roth IRA. If you use a credit card but don't fully fund your Roth IRA each year you have a credit card problem. Unlike a traditional IRA, you contribute to a Roth IRA after taxes, it grows tax free, and then in retirement you can make tax free withdrawals. Because the money is contributed after taxes, it is best to fund an IRA while you are a poor college student working summers and part time and still in a low tax bracket.
Contributing $2,000 a year to your Roth IRA during high school and college is better than starting to contribute during your first year after college and continuing for the remainder of your life.
Every seven years you wait to fund your Roth IRA you cut in half the standard of living you will have in your retirement. With normal market returns, after seven years of $2,000 a year contributions your Roth IRA will be appreciating at a rate of more than $2,000 a year, without any additional contributions. At normal market rates of return, that $14,000 contribution during high school and college will ultimately grow to more than $2 million dollars by age 67 and more than $4 million dollars by age 73.
Whenever you look at prices in a store or restaurant, imagine taking the decimal out in front of the cents. That is how much tax free income you are losing in retirement by not contributing to your Roth IRA. And by age 85 you could add another zero. The $8.50 lunch costs you $850 at age 63 and $8,500 by age 85.
If you don't think you have any problems with your use of credit cards, but you haven't been saving and fully funding your Roth IRA, you have a problem with your use of credit cards.
Every time you go to use your credit card ask yourself if you've fully funded your Roth IRA for the year. If you haven't, put the credit card right back in your wallet.
All debt is not equal. Credit card debt is bad debt. Student loans are good debt. Good debt is anything that last longer than it does to pay the loan back. Good debt is investing in things that will pay you more money than the debt costs. An education is good debt because it will increase your income, satisfaction in life, and longevity.
Credit card debt is bad debt. Bad debt is anything that you can wear, eat or drink. Always pay cash for these items. If you do, what you wear, eat and drink will be healthier and less expensive. The next time you pull out your credit card for any of these items imagine wearing, eating or drinking $20 dollar bills.
Use these visualization techniques to stem your excessive use of credit. Alternately, just leave your credit card locked in your dorm room. Life's too short to let it get sucked dry by credit cards.
Marotta Asset Management, Inc. of Charlottesville provides fee-only financial planning and asset management. Visit www.emarotta.com for more information. Questions to be answered in the column should be sent to email@example.com or Marotta Asset Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.
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