The other day Mr. MMM and I were sipping our morning coffee at a local, trendy shop (we were given a gift card for Xmas 🙂 and discussing our debts and financial goals for 2017. That conversation turned into us wondering about the debts of an average American household. This was speculative, of course, since we are only guessing what the average American household pays each month. We guesstimated that average in America equals a mortgage, possibly a second mortgage or HELOC, two car payments, a pricey cable/Internet bill, credit card debt, and something called Designer Debt. Designer Debt, in our opinion, includes everything from $300/month cable bills to new cars, fancy clothes, expensive vacations, traveling sports teams, high-priced lunches and dinners, and yes, lattes. Spending foolishly and creating Designer Debt allows people to emulate the wealthy by doing the things they do, wearing the things they wear, and driving the cars they drive. It also puts many people in the fast lane on their way to Brokesville!
Designer Debt happens when people live beyond their means. It’s really that simple. It rears its ugly head in the form of credit card debt, second mortgages, HELOCs, personal loans, 401k loans, sky-high cable bills, etc. Don’t get me wrong, Mr. MMM and I LOVE quality things. We buy brand name clothes (sometimes new and sometimes at a consignment shop), good cars (always pre-owned and we drive them into the ground), and we go on nice vacations (we save and pay for them with cash…check out our completely paid for, not-so-frugal Disney vacation here!). But you won’t catch us paying hundreds each month for cable TV or going out to dinner every week. No sir. In fact, we don’t even have cable TV. Read all about how we cut the cord and never looked back here.
5 Tips to Avoid Designer Debt
Here are 5 quick tips for avoiding Designer Debt:
Identify your goals – Without goals you have no focus and will be more likely to spend money on things you don’t need or even want. Check out this post on stuff we just stopped buying here.
Evaluate the things you value – Evaluating the things you purchase allows you to understand why something is important to you and why you have spent money on it in the past. It also allows you to determine that some things just aren’t worth the expense.
Determine the long term costs – Determining the long term cost of something means understanding how much that money could work for you if invested instead of being spent on said item. For example, that $5 coffee each morning before work is costing you approximately $18k every decade. If you value that coffee to the tune of almost $20k every ten years, then go for it. If not, maybe there’s an alternative. Insert any non-necessity item for $5 coffee above and do the math. There’s a handy dandy calculator here. FYI, I used an 8% return.
Prioritize the things you value – After you evaluate your wants, needs, and life goals, prioritize what remains. Maybe you can cut out lunches with co-workers but not your morning coffees. Maybe you can nix the gym membership by working out at home but you still really value and want to keep your haircuts at the fancy salon. The point is to figure out the importance of things you spend your money on, determine how much these wants are costing you if you would invest the money instead of spending it. Then take action. Keep it or cut it.
Spend money only on things you truly value – Continue to spend money on the things you truly value. This should be guilt-free spending, as long as your basic needs are met and you’re working towards your financial goals.
We resolved over a year ago to only spend money on things we value. Our wake up call was a near catastrophic financial mistake. We were days away from purchasing a home we could barely afford. It would have been the ultimate Designer Debt crime. Read all about it here. Thankfully, it fell through and we were able to re-evaluate our life goals and determine what we truly valued. The result? We mostly value experiences (read about the day I blew money in Philly here 🙂 and a nice home with quality finishes. We were able to determine, after stepping back and taking a financial inventory, that we value quality over quantity. We didn’t need a 3,000 SF house as long as our house had nice features. Check out our home renovation (paid in cash) here!
After switching gears and identifying our values, not only are we happier and healthier – we’re richer too! Oh, what a feeling!
What are your goals? How do you avoid falling prey to designer debt? Or, have you fallen prey to designer debt? If so, how are you managing it? Please leave a comment and tell us how you do it!
As always, Mad Money Pup encourages you to read Our Story and use the super convenient social media buttons to spread the LOVE!