Have you heard of the phrase “poverty charges interest”?
Tay Zonday posted a Tweet on Jul 19, 2018, that read:
Being poor now just leads to being more poor later. Can’t pay to clean your teeth? Next year, pay for a root canal. Can’t pay for a new mattress? Next year, pay for back surgery. Can’t pay to get that lump checked out? Next year, pay for stage 3 cancer. Poverty charges interest.
— Tay Zonday (@TayZonday) July 19, 2018
He wasn’t wrong. And the more I’ve thought about it, the more examples I can think of. Largely, examples surrounding debt & credit scores.
Let’s break down what I mean by this…
Let’s say something out of the ordinary comes up, and you don’t have enough saved to cover it. You put it on your credit card because it’s urgent, but you already live paycheck to paycheck. Because of this, once your bill becomes due, you’re unable to pay it in full, and the cycle of debt perpetually gets worse, and slowly your credit score begins dropping because you’re unable to make your payments. Not only are you paying terrible interest rates on credit card debt, any future loans you take out (for a car, house, or otherwise) will give you less favorable interest rates as well. It may also mean that fixer-uppers are the only thing in your budget, which can be notoriously high maintenance.
As you can see, only a few misfortunes can lead to a snowball of debt. This is why it is so crucial that you have 3-6 months of living expenses set aside for emergencies. It’s far better to borrow against your own savings for an emergency than to pay interest to someone else.
If you find yourself not in debt, but also not getting ahead, here are some of the best steps you can take:
- Set up a recurring contribution each month to a High Yield Savings Account (HYSA). If you have to manually do it, it will get done a fraction of the time. If it happens automatically, you will naturally adjust your spending to accommodate it.
- Track your spending by category so that you even know how much you need to have saved up
- Cook more of your meals at home. Eating out adds up, and you can not only improve your health by doing this, but you’ll be surprised at how much further your money goes when you buy groceries instead.
- Take a hard look at your discretionary spending and see if it’s holding you back from reaching your goals
If you’re already in debt, you can apply the same steps from above, but split your debt payoff amounts 50/50 with investing. If you don’t get to invest early on, you lose out on decades of compound interest.