Businesses know how to make you buy a product. Don’t become a victim of their mind tricks.

What an amazing deal! I can’t believe I’m getting such a steal! 

When buying a product on credit, it’s not hard to fall victim to believing you got a great deal. Big companies know how consumers think and they know how to get a product into their hands as quickly as possible. Millions of dollars are spent advertising and researching consumer behavior.

One technique companies use to peddle their product onto consumers is to make them believe they are getting an amazing deal. I’m sure you’ve seen infomercials which tout that you can buy a product with “6 easy payments of $99 a month, no money down!” Would you still but the product if they told you it was “$600 dollars plus interest at a ridiculously high interest rate!” I don’t think so.

This same thing goes for cars. In the last article I discussed the negatives of taking out car loans. Once again, companies with throw out phrases like “only $299 a month for 60 months.” For them, it’s all about framing and making your gigantic purchase seem not so gigantic. When you spend a little amount over a long period of time you are dying a very slow but painful financial death of a thousand cuts. You become a servant to the lender and lose any chance at financial freedom.

The little things add up on both sides of the coin

You know how saving small amounts over time can add up? Well spending small amounts over time can have that same effect, except you suffer instead of benefiting. Don’t get fooled into thinking you aren’t paying a lot. Don’t look at purchases as payments in monthly installments. Take a step back and realize what the total cost of your purchase is, and then decide if it is really worth it to you.

We are all victims of the instant gratification bug

Instant gratification. We are all guilty of it. How could we not be. We live in the of the fastest generations ever. I was on Amazon the other day looking for books to read and stumbled across one that was on my short list of books to read. I went to the page for the book and in less than 10 seconds and the click of a single button, that book was delivered to my Kindle. I even commented to my friend how scary it was that I just bought something with the single click of a button.

With how quickly it is to buy things now, it is easy to get tripped up and knocked off the path to financial independence. In a matter of seconds you can spend hundreds, heck, even thousands of dollars. Back in the olden times you actually had to get in your car, drive to a store, find the item you wanted before you could even purchase it. You had time to think about the purchase you were about to make before you made it. By the time you got to the store you may have even reconsidered making the purchase altogether.

Once again, companies are behind making it easier for consumers to buy products. The faster you can buy a product, the less time you have to think about whether or not you truly needed it. It is their job to figure out how to get a product into your hands as fast as possible. Look around you. It’s everywhere. Fast food, Wal-Mart on every corner, one click purchases.

Considerations you should make before a major purchase

1)      Do I really need this product?I advise you, before you buy a product, take exactly three minutes before you click buy and consider the following:

2)      Will I still be satisfied with this product in six months?

3)      Does this product help improve my life?

4)      Is this not an impulse purchase?

5)      Can I afford this product without going into debt?

6)      Finally, Do I have a good reason for this purchase?

psychology of debt

The more “Yes” answers you have, the more likely it is that your purchase is a good one. It can be a dangerous trap when you combine instant gratification with credit cards. Not only are you mindlessly buying something, you are buying it with debt which can take months or years to pay off. This is precisely why I advise you take at least three minutes to really think about what you are about to do. Don’t set yourself back two years for a purchase you made in ten seconds.


  • Companies know how consumers think, and will make a large purchase appear smaller by giving you the cost per month instead of the total cost of a product.
  • Just like saving a little bit adds up over time, spending a little bit in monthly installments will add up over time. Understand the actual cost of your purchase.
  • Companies know consumers seek instant gratification and have responded by making products quicker and easier to buy.
  • Take into consideration the six questions I listed above before you make a major purchase. Don’t let a split second decision set you back years.

Photo Credit/Flickr User Paul Inkles


The Psychology of Debt: Part One

psychology of debt

Close your eyes and think about a time when you entered into debt. What was your thought process as you made the decision to take out that loan? While it is simple to say that you just needed to borrow the money, it is important to look deeper at your mindset when you entered into debt. How you think about money and debt can have a huge impact on your financial decisions down the road. By understand the mind and psychology behind debt, you can greatly improve your future decisions regarding debt management. When you are finished with this series of articles you will have gained insight on why people enter into debt, how you’re impressions of money impacts debt decisions, the need for instant gratification, and the psychological concept known as “conspicuous consumption.”

Why do we get into debt?

Debt opens up opportunities to make purchases you couldn’t have made otherwise. It’s only recently that credit cards and other forms of credit have risen to popularity. As you know, having debt is a doubled edged sword which can be amazing if utilized right, but absolutely horrific if used incorrectly.

You subconsciously believe you have more than you do

Credit cards give you the impression of having more money than you really do. If you have access to a card with a $1,000 limit it appears that you have $1,000 that you are allowed to spend. Mentally, you believe that I you actually have the money in your hands and freedom to purchase whatever you may like. You don’t really have to consider whether or not you can afford the purchase. Instead, your mindset shifts into thinking “I still have money left on my card, so I can make this purchase. I may not have the money right now but I can make payments and figure out all of that stuff later.” Don’t be a person who needs to “figure it out later.” If you need to figure out how you are going to afford something, you can’t afford it. Put your card back into your wallet and walk out of the store.

You begin to justify your purchase when you believe you have money to spend just because you have maxed out your card. One way of justifying a purchase was already mentioned, “figuring it out.” Other ways people justify purchases is by telling themselves that it is “just this one time. It won’t happen again.” The issue with this is that once you do it one time is so much easier to do it again. Look at drug addicts. How many started out by saying they were just going to take one hit? It can be a slippery slope if you fall into the “just this one time” trap.

Another justification is that you will make more money and that you can afford minimum payments until then. Maybe you are expecting a raise or maybe waiting on a big check from one of your clients. Whatever the case may be, you justify your large purchase because you will be “making more money soon.” Avoid this pitfall as well and remember, don’t spend money that you haven’t yet earned. You are putting the cart before the horse if you do otherwise.

Have you ever justified one of your credit card purchases only to regret it later? What was your justification?

Photo Credit/Flickr user digitalbob8

Bad Debt and Quicksand

I always thought that quicksand was going be a much bigger problem than it turned out to be. You watch cartoons and quicksand is like the third biggest thing you have to worry about behind actual sticks of dynamite and giant anvils falling on you from the sky. As I got older, not only have I never stepped in quicksand, I never even heard about it. -Comedian John Mulany

While we don’t have to deal with our childhood fears of actual quicksand being an issue, we do have to deal with another type of quicksand, bad debt. Bad debt shares many of the same attributes of quicksand. They both can seemingly come out of nowhere and trap you, both are difficult to get out of, and the only way to escape is by remaining calm and escaping slow and progressively.

There are a few distinct traits associated with bad debt. The four things immediately come to my mind when I think of bad debt. Those traits are high annual percentage rate (APR), debt used for consumer goods, debt used for something you can’t afford, and debt that isn’t used to invest in something. With that being said, there are a few common types of debt in which these traits are prevalent.

Credit cards

The first type of bad debt is credit cards. Credit cards have historically had a high APR which can kill any efforts you try to make to save money. According to bankrate, the average APR for fixed rate credit cards is 13.02%, while the average rate for variable rate credit cards is 15.61%. These rates are ridiculous! To put that in perspective, the average rate on a mortgage is 4.43%, a five year Certificate of Deposit is 0.79%, and an auto loan is 4.22%. Using the rule of 72, it would take about 4.8 years for your debt to double at a variable rate of 15.61%! These insane APRs are the driver of the figurative quicksand which can sink you in no time.

Credit cards are generally only good for one thing and one thing only: building credit. You can easily build credit by using credit cards on all of you normal purchases and then paying off the balance either immediately or at the end of the month. This way you will not allow yourself to forget about the card payment and only make minimum balance payments. Do not use credit cards if you are not disciplined enough to use them. You will be better off avoiding credit cards if you have a habit of putting off your expenses every month because you think you will have enough money to cover the payment at the end of the month, only to discover you can barely make the minimum payments.

Also, don’t be tempted by the amazing rewards credit cards offer. If you do not have the discipline or the financial means to be able to pay them off every month, all of the interest payments you make to ruin any potential benefits you could hope to get from a rewards card. The only time you should concern yourself with the rewards of a credit card are when you are using a credit card for the sole purpose of building credit, make only typical purchases with the credit card such as food and gas, and pay off the balance immediately or have automatic payments on your account activated which will pay off your credit card balance every month.

Store Credit Cards

Store credit cards are even worse than credit cards. Not only do they have a higher APR, you dare extremely limited in where you can use the credit card. I learned this during my sophomore year in college. I needed to purchase a suit for my first career fair so I made a trip to JC Penney to get one. I found a nice gray suit, and I also had to buy a dress shirt, a tie, dress socks, and dress shoes. The salesman even gave me a great deal, all I had to do was sign up for a JCP credit card, and I would get and amazing discount of $20 off my shoes. Being young a naïve, I took the deal. I was saving $20 so it was totally worth it. I went home, made sure the pay off the balance on my account, and haven’t looked back.

It actually wasn’t until recently that I actually looked at the fine print of the JCP credit card and saw that it had a APR of 27%!!! That’s almost double the APR of the average credit card. Using the rule of 72, it would take only 2.7 years for the balance to double from interest alone! Not only that, but you can only use the credit card at JCPenney, Sephona, CVS, and Rite Aid. All of these places mostly sell consumer goods, which you don’t want to be buying on credit anyways.

There is one last issue with store credit cards. This one could be affecting you, so be on the lookout. There are credit card scammers out there who target dormant credit cards. While you may believe the credit card in your wallet isn’t something you could worry about, scammers can actually get access to these cards and use them for months, maybe even years before you even notice. It is recommended that you check all of your credit card balances every month to make sure this doesn’t happen to you. Do you really want to be checking every store credit card you have every month to make sure there isn’t any suspicious activity, just to save $20?

Moral of the story is never get a store credit card. Saving $20 or $30 just isn’t worth the trouble. The APR is high, the credit is used to purchase consumer goods, and your unused store credit cards are highly susceptible to scammers.

Car Loans

Imagine buying a new car, and the salesman says you can get a great rate of 4.22% on a new car over 60 months. Not too shabby you think, especially when you compare it to credit card debt of 15% and up. Except your car will lose value the moment you drive it off the lot. According to, a new car will lose 10% of its value the second you put a single mile on it.

What does this mean in terms of your auto loan rate? Let me illustrate this with a quick example. Assume you purchase a brand new car for $30,000 which will be paid over a 60 month period at a rate of 4.22%, the average rate for auto loans. For simplicity sake, let’s assume there is no down payment on the car. When you drive that car off the lot, it will lost 10% of its value, which now makes the car worth $27,000. Now your relative interest rate is 8.62%, given this new, lower value of the car. You are taking out a $30,000 loan on something that is now worth $27,000! Not only that, but after a year of driving, the car will lose another 9% and continue on losing value as time goes on. As I discussed previously, using loans to buy depreciating products is a terrible idea, and a new car of one of the fastest depreciating products you can possibly buy!

I want to end this on one final note: in 2013, Ford made $7.5 billion in revenues from financing cars alone. Do you really want to be a part of that crowd?


There you have it! To recap bad debt has any of the following traits:

  • High APR
  • Used for consumer goods
  • Used to purchase something you can afford to pay for, even on a monthly basis
  • Not used for investing – instead it is used for depreciating assets

Are there any other types of bad debt you can think of that I didn’t mention above? 

Good Debt is Good

Imagine a fresh start. You don’t have a single penny to your name. You’re in a new city and you don’t know anyone at all. You don’t have a job. What would you do? One option would be to live out in the streets. However, having a dirty appearance and wretched smell might hurt your job search. No. That wouldn’t work. You find yourself wandering door to door scouring for a job. A couple a days go by without any luck. On the third day, someone catches your eye, and they make you an offer. They will give you a place to stay while you search for a job. The only catch is that they want you to pay them back once you have stable income. Would you take the offer?

If you said yes, you just entered into debt. Good debt. You see, debt allows you to do things that you would otherwise not be able to. In this situation you have access to a place to sleep and bathe yourself. This debt allows you to stay well rested and clean while you look for a job. You have a much better chance of landing a job if you are rested and clean. This is precisely why this type of debt is good. Good debt creates opportunities, helps you reach your goals, and enhances your life.

Good debt will allow you to invest. You can invest in yourself or in the form of an appreciating assets. Some examples of good debt are mortgages, student loans, and business loan.

Home Loans

Most people do not have the capital to pay for a house without any loans. Good debt in the form of a mortgage will make your dream of purchasing a house a reality. I know of one expert who will argue that mortgages are bad. The recent housing crisis appears to have validated this argument. Despite these arguments, mortgages are not evil. Mortgages allow you to build equity in an asset.

When you rent an apartment or a house you are throwing money in the garbage. You don’t build any equity. Instead, you are building the equity of your landlord. Your rent goes towards their mortgage payments. Your landlord will reap the benefits of owning a home and what do you have to show at the end of your lease? Your security deposit…if you’re lucky.

A mortgage is only good debt if you are smart about it. People were not smart during the housing boom and collapse. People took out huge mortgages which they could not afford, and as a result, they went bankrupt and lost everything. These people did not know what they were getting into. They believed they could purchase a house worth half a million dollars while they only made $40,000 a year. The take home message is clear: only buy something you can afford. Your mortgage payments should amount to about 25% or less of your yearly income. Also, don’t forget about the other expenses associated with owning a home. Insurance, property taxes, maintenance expenses, and if applicable, homeowners association fees will all eat away your income if you don’t do your research beforehand.

Student Loans

Let’s face it, school is expensive. Without student loans I would have never been able to finish college. Many other people were in the same boat as me. Student loans gave us the ability to go to college and invest in something we otherwise could not have invested in.

If you do decide to take out student loans it is very important that you weigh your career options vs. the cost of going to school. The fact is, some majors are better than others in terms of preparing you for a career. English, Philosophy, and History majors are all areas that are not very specialized and could be difficult for you to get a job in. If you take out student loans to pursue a major in these areas you could have a very difficult time finding employment. You are better off pursuing something specialized such as Engineering, Accounting, or Computer Science. These areas of study give you skills that are highly sought after by employers and will get you a high paying job soon after college is over.

I’m not advocating against studying the arts. The issue is this: When you take out student loans to pursue something you love you are putting yourself at risk very early on in life. If the subject area you love doesn’t have job opportunities, you could end up with $30,000 in student loan debt while working for $10 an hour at a department store. This will put you in a deep hole very early in life that can be difficult to climb out of.

With that being said, DO NOT make student loans your primary source of money to pay for your education. Do your research and figure out other means to fund your education. One of the biggest regrets I have is that I didn’t take more time searching for scholarships before I started school. I know many people who have actually funded their entire education through scholarships and got out of school debt free. Besides scholarships, there are also many grants out there for students who need financial assistance. The amount you get awarded for these grants to vary significantly depending on your parent’s income status. You could also help fund part of your college by taking on summer jobs or working while you are in school if you can do so. You could also take extra classes over summer and graduate school earlier so that you begin working in your career sooner and take out less loans. Finally, if you or someone you know is in high school, I highly recommend doing dual enrollment or advanced placement classes. The beauty of these classes is that you receive college credits and don’t have to pay anything out of pocket for them!

Student loans can be a great tool to assist you in completing college. Just like I noted with mortgages above, you have to be smart about student loans. Consider what you want to study, where you want to study, and other payment options before making the decision to take out your student loans.

Business Loans

Businesses can expand at a much quicker rate when they use loans for leverage. Leverage allows you to use a combination of your money and someone else’s money and multiply the return on investment. Let’s take a look at one very simple example of leverage. Let’s say you have $5,000 and you invest it in your business and you have the potential to triple your returns. You could potentially earn make $15,000 on your $5,000 investment. Let assume you can do the same thing, except this time you take out a $10,000 loan in the process? Add your $5,000 to that and you now have $15,000 to invest. If your returns triple on that investment you could make up to $45,000. In both situations you only put down $5,000 of your own money. In situation one above, you made three times what you put in. In situation two, after you paying back the $10,000 you borrowed, you will make seven times what you put in. This is leverage in its simplest form.

Small and large businesses alike use leverage. In order to properly use business loans, consider the following: Will a loan help me expand business? Will a loan be used for investments only and not to cover ordinary business expenses? Do you understand the risk you are taking by leveraging debt? Have you minimized your risk of loss by doing adequate research? If you answered yes to all of these questions, you may be a good candidate for taking out business loans.

Remember, good debt is good because it will allow you to invest. You can take on opportunities. Good debt can turn bad. Just know one thing. Good debt does not close doors, it opens them.

Do you have any good debt? Have you ever had good debt turn into bad debt? 

Isn’t All Debt Bad?

NO. All debt is NOT bad. This flies in the face of many personal finance gurus who want you to believe all debt is evil. They shout at you saying: Pay off your debt! Don’t be a slave to debt!

It is very simple to just say all debt is bad and tell people to pay off credit cards and be done with the topic. The issue with this is those who give their readers this advice are really doing them a disservice. Debt, when used correctly, is a tool that can actually help you with your finances. In order to turn debt into a tool you need to educate yourself on the differences between good debt and bad debt, which I will present to you later on.

Why is Debt Perceived to Be Bad?

One word: Misuse. The majority of the population misuses debt. How do you misuse debt? Continue reading

Part 1: Debt

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Welcome to Part 1 of my completely free guide to personal finance. If you have not done so already, check out the introductory post. There you will find a table of contents which will be updated each time I complete a post in this guide.

In Part 1 of this free guide to personal finance I will discuss the topic of debt. Within this section I will tackle a number of different topics which relate to debt. The topics are as follows:

Isn’t All Debt Bad?

Good Debt is Good

Bad Debt

The Psychology of Debt

The Use of Credit Cards


As each post above is completed it will be linked. Remember if you have any comments or suggestions just drop me a line. Also, thanks to a suggestion by Jef Miles @, I have added buttons at the end of each post which will allow you to share my articles on Facebook, Twitter, and Google Plus. With that being said, let’s get started!


Hello and welcome to my free guide to personal finance! The goal of this free guide is to help teach you the basics of personal finance in an organized format. I have not noticed any website that had any sort of guide like this. I want to be the first person to offer a completely free guide with no strings attached. No sign ups, no fees. Just great information to help you get started on your path to financial freedom.

The Age of Information

The internet is a great resource. You really can learn just about anything online these days. With that comes good and bad. Because there are so many resources and information, you can get all sides of any topic. You have to opportunity to read opinions from people that you never would have had access to in the past. This is a fantastic age that we live in! Or is it? There is one major problem that has occurred to me during my years surfing the World Wide Web: There is so much information EVERYWHERE. Take personal finance for example. You are barraged with titles like: Debt is bad! Why you should budget today! Pay off all of your debt! Investor loses everything in Ponzi scheme! With all of this information, it is easy to lose track of where you are.


The news wants you to believe investing is scary. Personal finance bloggers cover the same topics with no organization. There is so much disjointed information, it is easy to get overwhelmed. I shut down if I am given too much information. It is almost as if my brain just stops at some point during the day and I spend the rest of my day in a haze. The purpose of this guide is to help you cut through all of that crap and avoid that mental haze. I don’t want to make a million unrelated posts that only give you a teeny tiny tidbit of information in each article. People have enough information as it is! What I want to do is give you a structured format to help understand personal finance.

The issue with reading individual articles and blog posts is you don’t know what to do with that information. It’s just kind of dumped on you with no real guidance what to do. Remember the saying: “Vision without action is just a dream. Action without vision is nightmare.” In this guide I will give you tasks which will align your visions and actions. I will make these tasks specific and simple enough so that you can easily complete them. My intention is to get you to fix your financial situation today. Stop waiting for something to change. Today is the day to get on the path to fixing your problems. Today is the day that you get on The Path to Financial Freedom and begin a long, exciting journey that will change the rest of your life.


This guide will be broken down into five major sections as follows:

Table of Contents

Part 1: Debt

Part 2: Your Spending

Part 3: Savings

Part 4: Investing

Part 5: Education

Part 6: Making More Money


This guide is intended to make personal finance easy and fun to understand by providing structure and actionable items. Keep in mind that this guide will be a work in progress over the next few months. I will be working hard to try to give you the best material possible. Please leave me feedback as I take on this venture and let me know how I can do better. If you have any suggestions feel free to leave a comment or shoot me an email at thepathtofinancialfreedom(at)gmail(dot)com. Also, if you have any friends who want to learn about their finances, please share this guide with them. With that being said, let the journey begin!

Part 1: Debt