Are you paying.. or receiving?

 

There are two kinds of people in this world – those who pay interests and those who receive them (Hat tip to Clint Eastwood). Buying things on credit means you are paying the price on the tag and then some. The latter part being interests going to those that had lent you the lacking money for the while until being repayed.

You are paying for the money. While a few percent mark up may not seem much it adds up pretty quickly. It’s a very successful business model for many organisations and people who live off of this.

For example lets take a look at the price of a leased car (leasing being is at all times high currently).  If a car carries a price tag at 30.000$, paying in cash up front that is also the money you spend on for buying the car. If you are paying off the lease at 5% rate for 1 year, money spent would be nearing 31.000$, but having a lease for the currently average 72 months expense is getting to about 35.000$. That is 5 thousands that could be saved or available for additional things to enjoy. That is almost 20% more than the intial price tag said. Imagine anyone convincing you what a good buy it is to buy something  priced at 30k with 35k of money? Except the creditors of course, just not with those words..

Reaching the stage of financial stability is to eliminate bad debt and to accumulate a buffer of savings. Debt can be good under certain conditons, like if it’s an investment for the future like education or businesss growth. Also when debt is aquired to limit bigger damage like using it for immediate health reasons.

Bad debt however is when debt is aquired to finance consumption and this should be eliminated, which leads out of dependence on debitors and leads to immediate savings due to not paying the interests.

If owing on more then one account, different methods can be used to prioritise which debt to eliminate first. On one hand repaying debt with highest interests and latter others (debt avalanche method) would have biggest effect, however sometimes going by increasing steps is more achievable (debt snowball method).

Other part of reaching for stability with finances is to accumulate a buffer of savings for for unexpected events and expense, like losing a job, car breakdown repair, etc. Such costs can be high relative to our income. Suggested amount of money to be saved for this purpose is between 3 to 6 months of expenses. This amount should be made easily available like in a bank account, not invested in equities which value can fluctuate significantly nor term deposited due to not being available immediately.

When we have cleared bad debt and accumulated the buffer our finance become stable. No longer unefficiently »leaking« money away and less prone to becoming indebted to some urgent unplanned expense.

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