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Avoid Debt Like A Plague
Debt is in fact a plague. It stops you from living a quality life. The mental pressure from the debt surely can make you feel tired and affect your health. Debt takes on other names such as "easy payment plan" to sneak into your personal finance.

Nowadays the credit system is a mess. Many first creditors do not assess the debtor properly. They later sell credit to second creditors as bonds, and many second creditors sell bond to third creditors. When there are huge amount of bad debts, the whole economy collapse.

Buying things on loan creates a illusion that makes you think you do not need to struggle for living. It is bad to be materialistic. It is worst that you are after materialistic life by having debt. Debt is always connected with squander. You need clothes, but you do not need clothes of latest fashion. Shopping does not mean happiness. Consumerism is a negative word. If you are seeking happiness, do something more practical and meaningful, e.g. earn more money without harming people and environment.

Taking loan is not a personal matter. It can bring impact to the society. Loans bring up the price of items because loans create demand for the items. For example study loan causes the study fee to increase. Housing loan causes the house price to go up. When new loan contract is signed, new money is created. The more the money is in the society, the less the value of the money is.

When you spend money before earning it, you are making other people rich but making yourself poor. That is why every month new loan sharks (both legitimate and illegitimate) come out. More sprout during football/soccer season due to bookie gambling.

Some people say heavy loan can urge you to earn more money. Will you stir up a bee hive and let the bees urge you to run faster? You rather want to motivate yourself to earn more money to buy the thing you want without debt.

Do not take debt for granted. Do not view it as part of our life. It is a serious society problem that may ruin a nation. We should view debt seriously like the old-timers. Last time debtors were dishonored. Although now there is no such perception but it still does not feel good to be a debtor and a debtor may be imprisoned in modern business law.

Debt

Do not regard the organizations which offers you credit as generous. Once you tell the credit card companies (even the reputable ones) about your phone number and address, they may even "sell" you out to their affiliates. Then you will be bothered by junk calls and mails. Do not be happy if they increase your credit limit because credit balance is not the money you have.

You do not really own the thing you buy on credit. Before admiring people with an expensive car, you should get to know whether he or she buys it on loan.

You should not just feel that your life is stable and you are able to pay the debt every month. Hiccup in life can happens. This hiccup can really mess up your personal finance even it just happens for one time. And you will be blacklisted among the bankers.

The school does not teach us about debt. Having zero money is better than having -100,000 money.

If you cannot buy something with cash it means you do not afford it yet. Buying it on loan will later gives you pressure and makes you hate rather than enjoy the thing you have bought. When I was a kid, buying things on loan never came into my mind. I knew to buy that thing I wanted I had to put in effort to accumulate money. By doing this I knew that thing was not bought out of a whim because after taking some time to save money, the desire to own that thing was still there. Kids nowadays may not be that lucky anymore due to the intensive exposure to debt concept.

Debt may make you tell lie for example when you cannot pay it on time and you bump into your debtee. Other example is you give your girlfriend a supplementary credit card and she becomes heavily in debt. Then you have to clear away her debt and your mom gets to know that and you have to tell lie to cover up for her.

Gambling is always associated with debt. Avoid even lottery.

Do not spoil your kids by buying them a lot of unnecessary things. Educate your kids about how money comes from. Otherwise you will need to clear off their debt next time. This is especially applicable for Asian parents.

Do not buy if you cannot afford it. If you already have some debt, you should buy something extra in life (e.g. a TV, an air-conditioner, a bigger house) only when all your debt is paid off. To start paying off, focus on the one that has the highest interest.

Do not buy car on loan. This also can slow down the increase of number of cars on the road. Some employers try to convince their employees to buy car on loan so that the employee will have a burden and will not quit the job so easily.

Exceptions

Borrow money only for top urgent or worthwhile matter. But do not lie to yourself on what is top urgent.

If you are going to live in one place for long, it is OK to buy a house on bank loan. But make sure the monthly interest amount is not more than your desired monthly rental amount. Let us say you pay $150 for room rental. If monthly house loan interest for buying a house exceeds $150, you should just continue to rent a room or look for a cheaper house. Of course it is better to pay the house installment loan than to pay for the house rental. And usually a house will appreciate if it is in a decent neighborhood. But again you need just a house, not a mansion. Note that you should not tell people that you own a house if you are still paying installment. The bank owns the house. The bank is the landlord.

You can allow yourself to be in debt only if you feel that you can start earning some money with it (not gambling, not MLM) in one quarter. Even you do not succeed for this time, you will learn a valuable lesson. In this case, the debt is considered training fee. Of course we must clear off all the "training fee" first before taking another "lesson". Do not take loan from loan shark / usurer though.

Do you have a fat wallet (due to having a few credit cards)? I do not discourage the use of credit card. It can be used to pay online (including utility). Credit card is quite necessary if you go overseas. You may bring two credit cards (e.g. a VISA and a Mastercard) abroad. But if you want to use credit card in your own country, you should just bring one credit card out. Just make sure you have enough cash to pay back the full amount in the monthly statement. This is like using a charge card. In fact you can deposit a bit more money into the credit card to make it like a debit card. Or get a charge card or debit card instead. Or you can have saving account with the same bank that issues the credit card and ask the bank to automatically deduct your saving to pay back the credit card monthly. Only then credit cards can be considered our helper. Get the one without annual fee.

What to do if already in debt

Make a target to achieve ZERO debt. Are you a businessman who needs cash for turnover? Is the ROI of your cash in saving, unit trust etc higher than the interest rate of your debt? If no, use up the cash to reduce the debt. Even withdraw maximum allowable amount from retirement account. Money in retirement account does not bring much joy when you retire if half of your life is in debt. The more you pay the debt, the less the interest will be. And you will have more freedom to explore your life around.
Posted: 2008-04-02; updated: 2013-04-06 by Ong Seng Aun.
I categorize this article under Money. Other articles are accessible from home page.
External pages that link to this article:
  1. Financial Planning
  2. Integrated Finance
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