In an earlier post I wrote that the first rule for money is to save. Saving money will always increase your wealth and provide you with the means to take advantage of opportunities or overcome emergencies that you can be sure will arise during your lifetime.
For many people the biggest obstacle to saving money is excessive debt. Personally, I see debt as a dream killer. One of the many problems with debt is that many people fail to consider the interest and monthly payments associated with debt. The amount of money borrowed is not the amount that you will actually pay and you will reduce your income each month to repay that debt.
Here is a simple example of the effect that interest has on the price of an item. If you purchase an item for $100 on credit with a 10% interest rate over one year, the actual cost of the purchase is $110. Therefore, you have just increased the price of the item you purchased by 10%. The result is that you pay too much for the convenience of not paying for it today.
Think about taking an item to the cashier to pay for it and you are told that the price is 10% higher than what is on the tag. You would not be happy and most likely would not purchase the item. However, each time that you purchase something on credit you have increased the price of that item by the amount of interest you will pay. If the interest rate is high and you make minimum payments, you could even double the cost of your purchase. Ask yourself when you make a purchase on credit if you would pay ten or even twenty percent more for that item.
The second thing that people don't think about is the monthly payments that are associated with debt. The fact is that your cash flow will be reduced each month until your purchase is paid in full. It doesn't take many purchases until you no longer have enough cash to pay your debts and living expenses. I like to think that I get to keep the money I work for instead of sending it off to some credit company. I also like to know that there is enough cash available to take care of important things in life such as food, vacations and emergencies.
Okay, you may ask: "How do I get out of debt?" I call it the "The Debt Diet." The first step is to make a list of your creditors and how much you owe each of them. Also, list the minimum monthly payment due to each creditor. Then determine how much extra you can pay each month. Find the least amount that you owe on your list and apply the extra money to the payment of that debt. If you have enough money to pay off the smallest debt, apply what is left to the next highest amount until you have spent the extra money. Continue to pay the minimum payments each month to the other debts.
Do this each month until you pay off the smallest debt. Then repeat the procedure applying the payment from the paid-off debt to the next smallest debt. Soon, you will see the amount that you are applying to your debt growing and the amount that you owe shrinking. In addition to using this method to pay down your debt, you should find ways to increase the cash that you have available to pay toward your debt. I have done this by working extra jobs and selling things that I no longer need through yard sales or the internet.
Once you start it doesn't take very long to see the results. It is kind of like beginning an exercise and diet program. Once you take the first step of eating less and exercising more, the weight begins to come off. Charge less and pay more and the debt will fall right off. In addition, once you have achieved your goal of becoming debt free you will feel the same as you do when you achieve your weight loss goal, you will feel better and be happier.
There are those who have substantial incomes and are able to make purchases and pay for them monthly. You will find that most wealthy people do not carry excessive debt. They wouldn't be wealthy if they did. Wealthy people find ways to make money work for them not against them. Debt works against your ability to have your income working for you. Don't be someone who works hard every month only to give your hard earned money away to credit card companies and banks. Don't make excuses like "I am building a credit rating" or "I will pay it off early." These are just that, excuses. Follow these steps to a better and more secure financial life.
In my next post about money, I will write about creating a monthly budget and tell you where you may find extra cash to help get out of debt.
0 comments:
Post a Comment