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Whenever we spend more than our income, we are overspending. For some of us, overspending can be almost unconscious—you buy that latte and new sweatshirt and then go out to dinner without adding up the costs in your head, much less on paper. We're not even aware of the hole we've dug ourselves into until it's too late. But in order to meet our financial goals, we need to live within our means.
Spending Your Future Income
The average student-loan debt of borrowers in the college class of 2011 rose to about $26,500, a 5 percent increase from about $25,350 the previous year, according to a report by the Institute for College Access and Success. The several hundred dollars these graduates pay each month to pay off the loan is money that can't be saved or invested for the future. It can't be spent on other necessities, such as emergency car repairs or household expenses either. It's money that's tied up until the debt is repaid.
While debt for education is considered "good" debt because it's an investment in your future, all debt obligates your future income because of the payments that must be made. So make sure you use debt wisely-eliminate "bad" debt (debt for depreciating assets, such as car loans and credit card debt) and limit the "good" debt to reasonable amounts.
Paying the Price of Debt
Interest payments on debt work against you. New college graduates carry an average credit card balance of $3,000. Let's say you're lucky—or better yet, careful—and you accumulate only $2,200 in credit card debt. Your interest rate is 18% and you pay the minimum amount each month on your card ($40) without any further purchases on your card. How long will it take to pay off your balance? Did you guess five years? Try 10. It will take almost 10 years to pay off the debt. Your total cost will be $4,680 (original balance of $2,200 plus $2,480 in interest).
Watching Yourself Spend
One thing you can do is record your spending activities throughout the day. You can use a small notebook or save notes in your cellphone. This will help you pinpoint where those small expenditures are going. If you mark down small purchases as you make them, you'll learn to think of each one as a single, purposeful act. Disappearing cash will cease to feel like something that magically “happens” to you, and those convenience store sodas and movie tickets you pick up on impulse will be revealed for what they are: spending leaks.