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Note: This is the fifth of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed

Credit card debt is an increasingly bigger problem in the US, Europe and parts of Asia. It seems that the convenience of buying something and paying for it afterwards in small payments is a luxury that is difficult to give a way.

In spite of hundreds of millions of credit card users there is however a substantial part of population who don’t use credit cards. If we take a closer look we will see, that these people mainly fall into 3 groups:

1. People who have been in major credit card or other debt that have faced the difficulties of paying back their enormous debts. These people have promised themselves that they will never use a credit card or take a loan again. Most people who have managed to come out of tens of thousands of dollars of debt usually end up by cutting their cards.
2. People who don’t trust banks or anybody but themselves to keep track of their money. A lot of Hispanics but also a good number of black and white people do the same. These people only use cash. For them cash truly is king,
3. People who are determined to go through life without debt.

While in essence it is a good idea to hold back on taking any loans but one should keep in mind that not all debt is bad debt. Even credit cards can be useful when used with care.

The people who are determined to get through life with cash and are almost never willing to go into debt - this post is for you! While being heavy in debt is a sure way of never getting rich it is also possible to never be in debt and not get rich. The reason is that people who are using mostly cash to pay for their purchases usually tend to save their money to get what they want. This is in no way a bad idea, except for the way that most people save. Let’s say that you want a new $20,000 truck. When you are not willing to lease, it means that you have to save up your money in order to buy the truck. The most common way that people do this is that they will set aside a sum every month until they get the magical 20 000 dollars needed to buy the truck. Easy! If you take a moment and think about it, it might not seem like a good idea anymore.

The correct way to spend money

Because you need money to make money you must never spend all the money you have

For instance if you managed to earn 10% on the 20 000 dollars the truck cost, it would generate 2000 dollars of extra income a year. Lets say that it took you 4 years to collect the 20 000 dollars. If you spend all this money on a car you have actually just lost 2000 dollars of interest a year. Since it takes 4 years to raise the money you just lost 2000 dollars 4times - that’s $ 8 000. But wait! There is more.

The 10% of interest you would otherwise earn on your money is compounding. This means that by the end of 1st year you would have 22 000, by the end of 2nd year 24 200, by the end of 3rd year 26 620 and by the end of 4th year 29 282 dollars. As you can see - by spending all your money you have just effectively lost 9282 dollars that you would have made in four years without doing anything else than keeping and investing the money you spent for a truck.

In the sample above you would make almost half of the money you needed to buy the car in the first place.

“But I still need to buy things!”

This is of course true and however frugal you might be there just is no way that you will not buy anything. The bad news is that there is no way to avoid losing the compound interest that your money would generate when you would keep it. The good news is that when you behave in a certain way you can still earn some of the sweet compound interest.

The secret is not to spend all your money at once

When you only spend a part of your money the other part will continue to generate interest and therefore make you rich. The bigger the amount that you manage not to spend - the more interest it will generate and the faster you will get rich.

It is good when you manage to save 10% of the money you raised but the saved 10% will simply not earn enough money. Therefore the golden rule is to save half of everything you spend. Some people have taken this rule as far as only allowing themselves to spend 1/10th of everything they have at once. This is the way to get rich!