You are about to enter the most expensive time of your life. Between the age of 25-45, you will be responsible for buying a home, having children, and saving for retirement.
It is a near-impossible task to make it out of this timeframe without debt. However, if we set a high enough goal, we will do better than settling for below-average results.
Welcome back to the Using Credit Cards 101 series (Beginners), where we discuss how to use credit cards successfully.
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The real test begins. Early in life, you are an individual. You leave home, and all you need to worry about is yourself. Your life is pretty simple and straightforward if you can control your spending.
However, the more people you add to the equation, the more chaos ensues. But don’t worry, the credit card companies are there to make it all better—NOT!
Your goal for these tough years is to avoid digging yourself into a financial hole. It is almost a guarantee you have some kind of automobile, housing, and student debt at this phase in your life.
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However, we can prevent or avoid wedding and credit card debt. So how do we use credit cards successfully when everything costs so much?
Understand the pitfalls. Unless your parents are good with money, you’ll struggle with this phase of life. That’s because you will attempt to mimic their lifestyle as you get married and have children.
The main problem is that life is much more expensive today than 30 years ago. I am talking above and beyond inflation. There are so many things that will grab your attention (and your wallet) that you must learn to fight your urges.
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Let’s review a list of financial responsibilities that will hurt your cash flow. The lower your cash flow, the easier it is to use credit cards to make ends meet.
- Child care. Child care is a must when both parents work—it is expensive. Even ten years ago, my wife and I paid $1,000/month for two kids. It’s much more expensive today.
- School. The school wants your money. You will have bus fees, lunch, clothes, field trips, fundraisers, sports, and special events.
- Housing. You will be buying your first home and realizing how expensive it is to maintain. You will have principal, interest, property taxes, insurance, maintenance, renovation, HOA fees, etc.
- Furniture. This is a big one that you may not consider. You will need to purchase couches, stools, desks, tables, outdoors, etc. It adds up quickly.
- Kids. You already pay for school or child care, but kids bring even more expenses. You have food for your home, braces, dental, toys, diapers, parties, etc.
- Vacations. You can’t just stay in your house all year; you will need to go on vacation. Credit card companies will promise you mileage, hotel, gas, and other points. It’s a trap at this stage in life.
There are even more things I am leaving off the list. You are still married and need to have special events with your spouse. All said, this timeframe will make or break your marriage (and life).
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Use credit cards to your demise. There is almost no way to use credit cards effectively during this time. There is just too much going on to risk it.
My wife and I did not have “the information” going into this phase of our lives. When we married, I was 25, and she was 22. We had our first son the year we married.
Without having the financial knowledge, we slowly got into credit card debt. While going through this stage in life, there is a Ponzi scheme afoot.
You are working hard at your jobs and predict new promotions and pay raises in the near future. However, it’s a trick. Your lifestyle expenses are growing much faster than your pay increases at work.
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The greatest lie ever. That’s how most people get into credit card debt and stay there—the lie of earning more money.
Without education, you will believe there will be a magical day when you’ll catch up financially. You’ll just start earning enough money to pay all of your cards in one fell swoop.
DO NOT BELIEVE THIS LIE. The only way to pay off credit card debt is by living below your means, sacrificing, learning how to budget, and building a financial plan.
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Forecast your costs. Now, you are smarter than me because you are reading about this phase of life early. My best recommendation is to forecast your expenses as best as possible.
For example, create a budget for school. You may say $10,000 for getting two kids through the school year. It may be high or low, but it is something.
If you don’t have a plan, you’ll turn to your credit card to fund the shortfall. If you can be honest with the cost, you can avoid using credit cards as often as I did.
Credit cards vs. personal loans. If you are nearing the end of the year with a shortfall, you may want to turn to a personal loan.
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Yes, paying 9-12% on a personal loan sucks. However, at least you set the terms and payments in stone. As Ramti Sethi says in “I Will Teach You to Be Rich,” you’ll know your debt payoff date as you sign for the loan.
Trying to use credit cards with this much going on will be like herding cats. List out your entire financial plan, no matter how scary, and keep daily tabs on your spending.
Yes, you will need to write down what you spend every day. It doesn’t sound fun because it isn’t fun, but what gets measured gets managed.
I am a 41-year-old man and keep a daily log of my spending in San Diego. I give myself $50/day to spend here. If I didn’t keep this log, I would often turn to my credit card.
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Conclusion. If you can avoid using credit cards at this stage, I highly recommend you take this route. There is nothing positive about credit cards when you have this many things happening simultaneously.
Things will get better after this stage. Your kids will leave daycare, and you can forecast school costs more accurately. You’ll build emergency and maintenance funds for your life and house.
You will be able to catch your breath. But there is a rough ten-year span where everything will be in chaos. You may not realize how turbulent it was until you are out of the raging seas.
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If you have credit cards, keep the total limit under $10,000. I would rather have five personal loans totaling $50,000 than one credit card with a $50,000 balance.
Credit cards are most dangerous when your kids are small, you are newly married, and you just bought a house.
Respect the danger of credit cards, and you will do fine. There is no magical moment where you will wipe all your debt at once, so don’t prepare for that day. Good Luck!
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