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The Real Price of Spending While In Debt: $6.25 Footlongs…

in Money Basics, Pay Off Your Debt

$6.25 Footlong!

Over the weekend, I went down to a friends house to hang out with a couple of my guy friends.  While I was there another friend asked me for some tips on calling and getting one of his credit card interest rates reduced.  He opened a credit card statement he had brought and showed me the balance.  As my eyes drifted down the page I saw a frightening sight…

24.99% APR!

Yikes…  Luckily, this is one of the only remaining debts my friend has.  Not so luckily, the balance he has on it would take him well over a year of focused action to completely knock out.  We discussed how he should approach calling customer service to get his interest rate lowered.  I pointed out he was the perfect customer! He had missed a payment or two a while back, but had since gotten current and had consistently been paying the minimum payments for way too long at that rate.  We talked about leveraging his long customer history with his recent string of on-time payments to negotiate a rate decrease.  If all else failed we would threaten to transfer the balance and close the account.  Customer Retention is one of the best departments in the whole company, especially when you’re as good as a customer as my friend.

After talking over some of his options I asked him, “Do you realize that, until we get this fixed, every purchase you make is actually costing you 25% more?”

Friend:  “I guess… you mean because I could use it to pay down the card…  I never really thought of it that way…”

To be completely honest, neither had I.  I pondered the concept for a moment and shoved it into the back of my brain as the three of us jumped into the car to go find something to eat.  As we drove through town we came upon the very difficult choice every vegetarian has to occasionally make…  Subway or Taco Bell?

My friend chimed in…

Friend:  “I’m definitely going to Subway…  You just can’t beat the $5 dollar footlongs!”

I tried to fight the urge, but I couldn’t resist…

Baker: “More like $6.25…  $6.25….  $6.25 Footloooooooooong!”

…without missing a beat my friend replied…

Friend:  “You know, you should really change your blog to www.ManVsFun.com!”

Ouch…  Score – My Friend 1 – Baker 0

Although we were obviously joking back and forth, my friend does bring up a great point about having some balance.  Although this technique can certainly help keep you on track by slowing impulsive purchases, I’d be a moron to suggest you should view every single daily purchase through a microscope.  What’s the point of being debt-free if you are miserable and alone?

Here’s the best of both worlds. In your budget, include categories that allow you to have a little breathing room.  Make sure you budget at least some for eating out, some for “blow money”, and even some to buy your spouse flowers, etc…  As long as you plan it out “on paper, on purpose, at the beginning of the month”, I wouldn’t view it as a frivolous purchase (at least for that month).

However, if something’s not in your budget, go ahead and pull out all the stops to keep yourself on track.  I’m all for leveraging your highest interest rate debt to remind yourself of the real cost of spending outside your written goals!  Look, I know the math is a little fuzzy (i.e. the % assumes it would take you exactly one year to pay off your highest interest rate debt), but that’s not really the point anyway. You could also consider Sleeving Your Credit/Debit Cards to constantly remind you of your long-term financial goals before pulling the trigger!

While none of these suggestions could be considered “life-changing” personal finance advice, I know from my own experience that every little bit counts.

For example, I really, really want a Kindle 2 (no I’m not going to link it…  what are you trying to do to me?).  Most days, the urge is rather subdued, but every time I see a video or article on one I start to drift.  I know, however, that the words Baker, Kindle, and Budget don’t really get along right now.  In order to impulsively make this purchase one day, I would have to reach into my wallet and pull out my debit card.  I would have to remove my debit card from the sleeve that says WARNING:  USING THIS CARD MAY BE HAZARDOUS TO YOUR FINANCIAL HEALTH! I would then not only have to justify the $359 price tag, but I would recognize that I could be using that money to pay down our highest interest student loan at just under 10%.  On a good day I’m not willing to pay $359…  Even on a bad day, $395 hurts a lot more!

In summary, the War on Debt is a long and hard one.  When you are sitting down to do your budget be honest by giving yourself some breathing room, especially in categories with which you struggle.  After you agree on a budget though, it’s time to utilize every weapon in your arsenal for staying on track.  Put as many hurdles between yourself and frivolous spending as you can!

What tips and tricks do you use to help minimize spending outside of the budget?  After reading this post are you convinced a random child could make more sense than me?  Join in on the discussion by commenting below!

{ 7 comments… read them below or add one }

Adam @ Checkbook Diaries March 31, 2009 at 9:37 AM

Adding the APR on your credit cards is actually a really good way to look at how much every purchase ACTUALLY costs you. The dynamic between friends is funny. In a group setting, I can see any one of my friends calling me captain killjoy for providing more than the bare minimum financial advice asked for, but in a one on one setting I think it would be more of a revelation that your friend comes to. Although when you are starting to get rid of debt, having a balance of debt repayment and spending is a good way to ease into it, I’ve found that once I’m rolling with my debt repayment I can’t STAND spending even on things that I really want. I typically end up talking myself out of things that I’ve been specifically saving for, because I worked so hard to save tha money.

Like the site, keep up the good work!

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Baker March 31, 2009 at 10:17 AM

@ Adam – I agree with you 100%! By the time you saved up the cash for a purchase, often times you realize it’s not worth the cash in your hands! It’s a weird feeling at first, especially if you were used to using credit cards like I was!

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Kate Kashman March 31, 2009 at 1:58 PM

I love, love, love this article! I’m linking and as I said in my link, “If I were carrying around high interest consumer debt, I would print out this article and tape it to my wallet.” Good stuff!

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Baker March 31, 2009 at 2:16 PM

@ Kate – Thanks for the comment! I’m honored you would consider linking it and appreciate all the support!

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Tom March 31, 2009 at 3:51 PM

This is odd because I was researching advice on what I should tell my Cousin and he’s in the same boat. I work with a lot of people in debt and it’s hard to give people the facts straight because they hear what they don’t want to hear.

They want the debt to disappear yet they don’t make more money or cut back on expenses. My cousin wants to get rid of his $4,000 debt at 20 something percent interest yet he won’t get rid of his outrageous $500 car payment, DirecTV with every channel known to man. Sometimes I can’t feel sorry.

Great post and blog BTW, keep up the great work.

Tom’s last blog post..Best Debt Collection Books

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sam @ moneypenny April 6, 2009 at 12:03 AM

This is one of my favourite subjects! I call it the ‘opportunity cost’ of your cash. Yes, that footlong might be $5, but what would (or could) that money be doing elsewhere? This is as true for when you’re in debt as when you’re not, because it can just as easily be applied to savings / investment interest as debt interest. For example, $10 a day in coffee/lunch/lotto tickets/etc. over a 40 year worklife adds up to almost TWO MILLION DOLLARS when you consider compound interest. Two million bucks in just ten dollars a day!

As I have a mortgage, I’ve worked out that a $40 thing actually costs me nearly $100 over the life of my loan. Makes you look at a cup of coffee in an entirely different light.

Fabulous post – keep working on your friend! :)

sam @ moneypenny’s last blog post..Getting Started – Part 3a – How To Create A Budget That Actually Works

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Marc Wyzykowski December 12, 2009 at 6:55 PM

Speaking to your question, I have resorted to leaving my credit card and debit card at my apartment in my desk. I have to make a conscious decision to bring my cards with me on days when I plan to make a purchase. On top of that, I leave the cards in my car during those days to ensure that I cant readily whip it out without having to make a deliberate trip back to the car.

That still doesn’t stop the mrs. from using her copy of the card though… Damn her!

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