Friday, December 08, 2006

Make light work of debt...

Debt in general is not considered a good thing and yet sometimes without it we cannot buy what we need. Lets say you wanted to buy a homestead. Not many of us would have the money upfront to go and buy it without some debt.

Is there good and bad debt? In my eyes, I would advocate to avoid it alltogether, but if you have to borrow to reach your goals the following might be worth considering :

the item you buy should go up in value and not down, usual trends, so for instance if house prices rise by 8% per year and your mortgage rate is 5% then the asset will still grow in a positive way even though you are paying interest on the loan you took out. Selling your home will then realise sufficient to pay off any outstanding loan. The aim is to pay the loan off as soon as possible.

If the item you buy depreciates in value, such as a car for example, then that would be a bad debt because your initial loan will not only accrue interest at 8% but the value will drop by 15% per year putting you in a spiral where you will never catch up.

If you want to buy an item, look to see how you can obtain it for nothing ( freecycle or sharing), second hand at the best price, or see if buying it somewhere else will give you more value for your money.

In the fifties, my parents bought a car with another couple; it gave them both means of transport and they just had to agree on who had the car when. Sharing meant that they got the car for half the price, half of the time but that they needed to get organised about its use.

Tools could be shared in your neighbourhood, that would mean that only one person would need a hedgetrimmer, someone else would have the chainsaw etc. Tools would be available to eachother when jobs needed doing, there would be less clutter and you would have a sense of community. We share a big ladder with our neighbour and he bought it in the shop with his 10% discount card. We store it as he does not have the room but when he needs to clean his windows we chat and he gets the ladder out. We also share lawnmowers, his is for a small garden that is quite flat and we opted for a model that will tackle longer grass and together we have the tools for whatever length of grass when it comes to it. Creating community and sharing with others can effect a saving,

The behaviour exhibited by many at the moment is that in order to keep spirits up, they need to go shopping and buy something on credit. Then the credit cards come in and they have to go and buy more because they feel bad........see what I mean.

To turn this around simply means that you need to be in control of what goes out. Ideally when you want or need to buy something you would have the money saved up but when that is not possible and you take on a debt...take it on, pay it off as soon as you can and make it serve you and not the other way around.

Let’s say the shop offers a 1 year interest free loan with no payments on a new sofa and you want that sofa. ( try and resist but if its useless) Make a note in your diary or on your computer system to create an alarm to revisit this debt. Invest the money in a savings account, let it accrue interest, pay off the sofa at the end of the year and cash in your interest. You win/win, you have the use of the sofa and you gain interest on their money. What usually happens is that people forget about the loan, get stung with high interest rates when the date is passed and go into resentment. So make it work for you. When you buy something the money has to be spent somewhere.

Another scenario that I have to say has happened to me in my early not so wise money times and I felt I had no choice but. I wanted to get a job to have more income. The job meant that I needed to travel a lot and my car was not that safe to drive so I bought a car with loan payments. I also needed to pay for my travel to and from work, lunches out, clothes to keep up with fashion, image haircuts on a regular basis, stress releasing activities such as massages, gym get the drift. The actual balance at the end of the month was actually that I was working 45 hours per week for a lifestyle and for someone else. When the job went, not only did I lose the monthly paycheque but I needed to continue to pay the car loan payments, and when I sold the car and cleared some of the loan, I ended up with a smaller loan and nothing to show for it. The moral of the story is to check out all the hidden costs of your purchases. Less may be more. I lived with a virtual partner at the time, I say virtual because we never saw each other, we had no control over our spending and we had no relationship either with eachother nor with money. It ended badly, with having to sell everything and starting afresh. So I guess I can speak from bitter experience...and ofcourse I am now wiser and greyer a little less about image and am with the right guy, affectionately called scrooge.

Debt can only work if you make it work for you and not if you become a slave to its power.

Remember that the skills you have have a price attached to it, and make up your mind how you can best market yourself , where the cost of living against your salary gives you the best value and the life you want. Take back your individual power and make informed decisions.

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