Saturday, November 18, 2006

Developing My Will to Avoid Debt

I avoid incurring debt by mentally associating it with an analogous situation I know I wouldn’t do. For example, I would not pay more for an item than the listed retail price. To me, paying interest on debt is doing exactly that – paying over the listed price. Consider the following hypothetical scenarios:

Scenario 1 – Use Debt
I see a couch for $2000. I don’t have cash, but I want it now. I buy it with my 15% APR credit card. It feels great to get the couch now. I pay it off at the end of one year with $2300.

Scenario 2 - Pay More
I see a couch for $2000. I like it so much that I offer the sales person $2300. The sales person gladly takes your offer. What seems wrong with this picture? Right, nobody would pay more than the posted retail price.

Both scenarios have the same outcome, paying $2300 for a $2000 couch. (For the purposes of this discussion, I did not include the effects of deals such as 12 months same as cash and 0% balance transfers or the time value of money.) However, Scenario 2 is psychologically more painful since I wouldn’t normally pay more than the listed price.

By thinking of using debt as “paying more,” I keep myself motivated to avoid using debt.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

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