Credit cards and loans can be a big help, or a source of stress, in our lives. I’d like to look at this, and share the approach I used to free myself from debt and develop a healthy relationship with money. I hope you find it useful.
Debt is the slavery of the free
Even after the controls put in place after 2008, credit cards and loans seem more easily accessible than ever. This is great news if you can manage them responsibly, because it gives you access to extra funds which can help you to launch or expand your business, take a dream holiday or pay for the training course which is going to take you to the next level personally or professionally. Being responsible, you’ll have a good idea how much you can afford to repay each month and how long repayment will take. Taking on debt in this instance is a calculated risk, but one that you already know is manageable and can improve your quality of life. Responsible borrowing, however, seems to be the exception to the rule.
A man in debt is so far a slave
Ralph Waldo Emerson
Despite proclaiming to prepare young people for the modern world, school systems are still neglecting to prepare these young adults for their financial futures. Lack of financial education, paired with the easy access to loans and credit cards can only lead to disaster.
Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt
We are bombarded daily with messages about how we should want more nice things, which are conveniently plastered all over social media, and that we shouldn’t settle for less. Thing is, nice things and a life beyond our means are expensive. This is where credit cards come in. Too many people regard them as easy money, with which they can buy expensive things to show off on Instagram. So, they take on mountains of debt in order to buy things which they otherwise couldn’t afford, in order to impress people they don’t know. They forget that this “easy money” is really a loan, and like all loans it will need to be repaid. If you’re lucky, your card will have 0% interest rate on purchases but this its usually only for 12-24 months. If you haven’t paid off the full amount by the end of that period, you could end up being charged hundreds every month in interest. So, now you have the outstanding balance to pay, plus the monthly interest. This is not a pleasant situation to be in. So, to avoid the stress and feeling of overwhelm, we took for a way out.
Debt creates stress, stress creates behaviours that don’t lead to happiness
This is where you need to be careful. When you’re stressed, you can’t think clearly, and can often make decisions that will do more harm than good to your current situation. In this position, the easiest way out is to take out a new loan or credit card to pay off the amount which you currently owe. On a positive note, there are a number of credit cards with interest free balance transfers for up to 36 months. This means that you won’t have to pay any interest if you pay off your balance in that time. The problem with this is that it’s not a solution, just a short-term fix. It stops you paying interest on what you owe, but it doesn’t help your relationship with money. All you’ve done is bought more time to pay off your debt.
To contract new debt is not the way to pay old ones
From personal experience (as I was always irresponsible with money), the only way to really deal with the problem is by taking control of the situation. Easy to say, but it doesn’t explain much, so i’ll share with you what I did when i’ve dug myself into a hole. On several occasions over the years, i’ve found myself owing up to £10,000 on credit cards. The first time, I took out new cards with 0% interest, buying me more time to pay off the full amount. The second time, I took on a second job, to earn extra money to pay off the balance quicker. The final time, however, I took control;
- Audit. This step is essential. Firstly, calculate how much exactly you owe. What interest, if any, are you paying? Now, go through your bank statements and determine how much you are paying every month in bills and other direct debits. Look at your spending. How much is being spent on non-essentials? What direct debits or bills can you get rid of? Are you using your gym membership? Do you need mobile phone insurance? By the end of this process, you should have a clear idea of what you owe, and how much you are left with every month after the essentials are taken care of.
- Track. I personally do this manually in my Filofax, but there are countless apps with which you can track your spending every month. Simple process, just make sure that every time you spend money from your account, make a note of it. What is it? From where? How much did it cost? This gives a clear idea of where money is wasted on non-essentials like junk food or going out every night. You identify areas where money can be saved. Best of all, you develop a healthier relationship with money. You become less inclined to make impulse purchases, because subconsciously, you know that every penny spent must be tracked and you can’t just forget about it.
- Pay your dues. Now that you know how much you are left with each month after the essentials are taken care of, and are taking steps to stop wasting money unnecessarily, attack your debt. Each month, pay as much as you can afford, to reduce your debt as quickly as possible. Most people who wait until the end of the month and use what’s left to make additional payments on their cards. Don’t do this. Make an additional payment on your cards at the start of every month and live on what’s left. This ensures that you pay down your debt quicker, but will also be less likely to find yourself in the same situation again. Plus, you stop wasting money, and put it towards what matters most right now. After all, if you have to tighten the purse strings and struggle for a few months without your little pleasures just to pay off your debt, you will do anything to avoid finding yourself in that situation again.
We don’t always need more money in order to be able to afford the lifestyle which we want. Sometimes, it’s just a matter of making better use of what we already earn. Obviously, paying off debts should be a priority, because when your cards or loans are paid off, you don’t have to make direct debt and additional payments each month. That money stays in your account, giving more money with which to do what you want.
Taking on debt can be a good thing if managed well. If it’s becoming a problem though, you need to do your homework and re-evaluate your relationship with money.
Rather go to bed without dinner than to rise in debt