So, this morning after breakfast, Ellie was sitting on my lap as Sonja read about Italy’s financial crisis. Ellie, who is six years old, asked me, “Daddy, what’s credit?” “This will be interesting,” I thought. The conversation went like this:
“Well, have you ever heard Mommy or me talk about a credit card?”
“Uh, yeah, I think so.”
“A credit card is a piece of plastic that you can use to buy things with a promise to repay. Let’s say that I’m the store where you want to buy something, and Abbie (I point to our still-eating four-year old, who is tracking intently) is the credit card company. You don’t have the money to buy what you want, so you ‘pay’ with the credit card. Then Abbie actually pays me (the store) what you owe, and you pay her later. The only thing is, you have to pay Abbie more than what you bought the thing for, since she did you the favor. That extra money is called ‘interest.’ Does that make sense?”
At this point, a huge grin came across the face of Abbie, my four-year old, who just realized that she (as the creditor) made out really well in that example. And she says, “Hey! Can we do that again? I like that.”
If a four-year-old can understand it, why can’t the rest of our society?
Someday when they’re a bit older, I’ll try to help Ellie understand that a disciplined person can get the best of both worlds by paying off the credit card every month, but that most people aren’t highly-disciplined, and can’t handle the buying power that a credit card offers. The Abbie’s of the world aren’t making money on Mommy and me; we’ve had two credit cards our whole marriage and never carried a balance or paid any interest. We have been very blessed, to be sure, but we’ve also tried to live smartly. Anyone can live smartly.
Sonja expressed, just before my chat with Ellie, that if people would only spend money they actually had, the world would be a different place (this says nothing of the principles of living within your means, and actually spending less than you bring in). It’s true, of course. In the world of macroeconomics, it’s a bit more complicated, but in the life of typical consumers like you and me, it really is that simple. It’s easier said than done, but the concept is that simple.
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