According to Nerdwallet, the average American Household Credit Card Debt was a whopping $15,762. There’s a lot of things that $15.7k can buy and I can’t help but wonder what they spent their money on. Maybe the utility they got from buying the product or service was worth it, I don’t know, so I won’t judge. Instead, I will go over some of the tests you could run to make sure that you are on track to build wealth, instead of losing it.
Failing a few of these tests here and there for necessary purchases will just be bumps on the trip but you will still reach your destination. Consistently failing the majority of these tests is a sure fire way for your net worth to trend downhill.
Is Your Cash Flow Positive?
By now, you have a budget that tracks everything and anything related to dollars flowing out and flowing in. You also understand it so well that as soon as someone mentions the word budget at a grocery store, you immediately think of the number that you are allowed to spend for that trip.
You also know which portion of your budget are fixed costs and variable costs and areas that you should be saving on to insure maximum increase in net worth.
You run your budgeted expenses against your earned income for a given period in time (I like to use the past month) and you come up with the difference. The number doesn’t matter greatly but the nature of the number matters. Is the number positive or negative?
If the difference is negative for an extended period of time (say, 6 months), then you are headed straight to debtor’s island, where you are slowly making someone else rich with spending money that you don’t have with hopes that the stock market will be on fire and return 10,000% the year before you hope to retire. This is beyond risky.
A dollar saved is not a dollar earned. Because of the ability to invest that dollar, a dollar saved is a dollar plus its interest earned. This is why the actual number that represents the difference between income and expenses doesn’t matter too much (it still matters) but the nature of the number matters more.
A positive number will increase your net worth by a much higher amount over the long haul, a negative number will decrease your net worth by a much higher amount over the long haul. This could be why the spread in net worth between the 1% and the 99% is getting higher. Lack of investment and savings!
How Much of Your Credit Card Bill Are You Paying?
This is a no-brainer. If you’re only paying the minimum on your credit card bill, it’s a sign for trouble. Credit card debt is one of the worst debt that you can ever have. Its interest rate is in the double digits (it’s hard to even get double digit returns in the stock market, but the credit card companies are consistently raking in double digit returns if you only pay the minimum! Provided you don’t default).
Do you only pay the minimum? If you can only pay the minimum amount on your credit card bill, that means you are buying stuff that you can’t buy with straight earned cash. A good psychology trick to use to make sure you can afford the item you are buying is to only use cash for a day, a week, or a month. Then you can really find out whether you can afford to purchase the product. If you can, then you can continue to use a credit card, if not, it’s time to let go of the trusty plastic.
I’m a big proponent of credit cards. I currently have 5 and am eyeing a few more to maximize the rewards that I could get. Plus I really love the 25-30 interest free grace period of 25 – 30 days that’s inherent in all credit cards. My FICO score is in the 760s, I have never missed a payment, and I am not in debt. I racked up about $325+ worth of cash back rewards over the past 2 years for spending money on items that I would have bought even without the rewards.
If you use credit cards correctly, it can act as a huge tool for being paid to spend money on things you were going to buy anyway. I only use my credit cards when I’m buying stuff that’s deemed as an absolute necessity. My credit card bill will be high this month (somewhere in the $1000s) it’s expensive moving into a new city, getting insurance, and buying food, but I expect to keep it below $600 all in per month going forward.
I never stress over my credit card bills because of a quick and simple test that I run. I assume that (unless you are making minimum wage and supporting a family) the wage that I earn is enough to cover any planned and necessary life expenses, such as food, insurance, and rent.
Every time that I come to a buying decision I ask myself whether the product is necessary for my survival. If I can wake up tomorrow the same way I woke up today, I don’t deem it as a necessity and have to see if I have enough in my “miscellaneous fund” budget.
Do You Have Everything Needed to Survive?
To survive means that you are able to wake up the next day with your health intact, a place to live, food in the fridge, and insurance. If you are missing any of the things that you need to live, then it’s a troubling sign. This could mean one of two things.
1. Income isn’t enough to support the spending habits
2. Spending is too high
It’s shocking to me how some of my friends spent a lot of money on alcohol and eating out during college when they weren’t working and had no consistent forms of income. I just hoped that all of their necessity were paid for or maybe that good ol’ mom and dad gave them everything they wanted.
This test is the most important test out of the three tests because it determines whether you can sleep soundly at night or not. Not sleeping soundly can lead to stress building, lower health, and a dread for the next day. Take care of yourself and your wallet will thank you for it. You are the biggest asset that can generate income for your bank account!
With examples of what to do to increase your net worth, I wanted to show tests you could run to ruin your net worth so you don’t do them. Avoid failing these tests consistently and it will help you build your net worth!
Readers, what are some tests you run to make sure that you are on the right path? Is there any other behavior that you avoid to make sure you are going in the right direction? Let me know in the comments below!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
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