The financial illiteracy of the everyday consumer in
Jim Bell of Strategic Investments has a phrase EVERYONE should know. It goes like this: “If your outgo exceeds your income, your upkeep becomes your downfall.” In other words, control debt or debt will destroy you.
Most do not fully understand that Credit = Debt, and Debt = Credit. Because of this poorly understood and grossly overlooked relationship, I keep having the same conversation with friends and family.
I find myself explaining the effect of seeing a little more cash in peoples’ paychecks is due to the newest tax credit from the Gov’t. I quickly learned that I had to break them out of the “taxes are mysterious so why try to understand them” way of thinking and introduce a new way of understanding THEIR OWN PAYCHECKS.
First, I lay a foundation with a simple question: Would you rather have $100 cash in hand or a $100 credit limit. (if they answer “credit limit” – I just walk away).
Second, I establish the meaning of credit and validate why the cash is the wiser of the two.
Third, I help them to make the leap from a normal credit limit and a tax credit. This is my favorite part. It is here that a relatively sharp individual comes to the full understanding that the extra cash now in hand will be paid back to Uncle Sam in their 2009 tax return. Normally, they begin to ponder why the credit is given if in the end it must be paid back.
The newly ignited ember of reasoning is so tiny, but that does not diminish the gloriousness of the feat.
-- Lache
