Friday, May 1, 2015, AM | Leave Comment
No matter how much you think some debts are good, it can easily turn into bad debt when you are unable to pay it back. Your chances of success in paying it back increases if you borrow to satisfy your financial needs instead of your wishes.
Don’t borrow more than you are able to pay. The smartest thing to do is to always borrow within your budget and follow your needs instead of wishes.
If you fulfill your needs financially and pay back the loan fair and square within the due date, then you would get the financial satisfaction you have always desired.
You would realize that you have performed very well financially. You would remove one worry, one big worry, from your life. The sweet smell of success in terms of debt-free life. WOW!
I said it before and I say it again, before you borrow or rent money, think about the total amount you are borrowing at whatever interest rate. Nothing remains the same.
As the old adage goes: “The only thing constant in life is change” – one of François de la Rochefoucauld quotes (French classical author.) Think about it. You have a job and good income now, you might not have it tomorrow. Millions of good and decent folks experienced unemployment the last couple of years.
If you have borrowed money for mortgage, education or credit cards and who hasn’t, you are paying extra money as cost of borrowing in the form of high interest rate.
If you compare it with the interest rate you are getting from the bank for your savings, that’s like showing a candle to the sun as the saying goes.
Especially when you borrow beyond your everyday needs, then the difference between the two interest rates seem to be quite large. The best investment you can make is to pay off your debt as fast as you can.
In two places you win absolutely.
Firstly, when your employer offers you matching contributions to your 401(k) plan, think of the extra money as the return on your investment. That by definition would give you a good return.
Secondly, when you pay off your debt and the money you save in interest is a sure return on your initial investment.
And think of the life you will have when you retire. Mortgage is paid off, no credit card debt. The life you live between retirement from work and retirement from life to your final destination would be a life free of financial worries.
What you need to do is…
Save before you spend. I call it decent saving as opposed to indecent saving where you spend before you save. In the first case, you always save. In the latter case, you seldom save.
What you need to do is cut down on your spending and spend less than you make. You would never go into debt.
And if you are already in debt, you would pay it off before you know it. Instead of looking at cloudy days of debt-laden life, you would be looking at sunny days of debt-free life.
You would eventually find the difference between the two kinds of days when you get there. Start seeing clear and warmer days.
Your last new year financial resolution…
No matter what your new year resolution was, being debt free should be your highest priority. Getting out of debt has never been more important as it is now.
I have done quite a few post on the difference between good debt and bad debt. I still believe there is a difference. Your good debt – mortgage, student loan – will benefit only when you have borrowed or rented money according to your needs and not wishes.
Many years ago banks would lend you money without asking the customary questions about your income, your financial obligations, your saving rate and of course your down payment.
The banks would let you stretch your financial legs as much as you wanted and more often than people would care to recall.
You would go for the largest house on the block. Banks were happy to lend you money. It was secured loan any way. They could grab the house and sell it to recover their outstanding loan in case customers defaulted.
It still would have been good debt if you had taken care of your needs only. Who wouldn’t want to live in a big house?
Mr. and Mrs. Jones, on almost every block, were living in the biggest house on the block and you wanted to live like them too.
Banks didn’t care.
If banks were people, they would care. But employees working for the lending institutions wanted to get a big commission and a big bonus especially the big executives. The banks those days very seldom refused loans to anybody.
In a Nutshell
Borrow or rent money on the basis of your needs, not your wishes.