Debt is a topic that brings about much confusion and debate. Some people say that debt is beneficial as it can be used as leverage in building wealth, whilst proponents against debt say that it can lead in you in a downward spiral in your financials life.
So this articles looks to debunk the myths and bring out the realities of debt.
- Myth: Debt is a tool and should be used to create prosperity
Reality: Debt adds considerable risk, most often does not bring prosperity and isn’y used by wealthy people nearly as much as we are led to believe.
The myth has been sold that we need to use other peoples money to prosper. In reality, debt brings on enough risk to offset any advantage that could be gained through leverage of debt.
Given time, risk will destroy this leverage.
Always remember that the debtor is a servant of the lender.
- Myth: If I loan money to a friend or relative, I am helping them.
Reality: If I loan money to a friend or relative, the relationship will be strained or destroyed.
In real life, once a friend lends money to another, the relationship changes as one becomes the master and the other the servant. The borrower will try and avoid the lender as much as possible once the money has been lent.
As the old joke goes, if you want to get rid of your brother in law, loan him money.
It is fine to give a money to a friend in need, but don’t mess the relationship by loaning them money
Get rid of the notion that a loan to a loved one is a blessing, it is a curse. Don’t put that burden on any relationship you care about.
- Myth: by cosigning a loan, I am helping a friend or relative.
Reality: be ready to repay that loan.
The bank wanted the consigner for a reason as they don’t believe the borrow has the ability to pay back the loan.
The lender requires a cosigner as there is a very high statistical chance that the applicant wont pay.
So why do you cosign knowing the full problems? This is to do with emotion rather than intellect. Think before cosigning anyones loans.
By cosigning a loan, you can get damaged credit or damaged relationships.
- Myth: cash advance, payday loans, rent to own and pawning are needed to help lower income people get ahead
Reality: those rip-off examples of predatory lending are designed to take advantage of lower income people are benefit only the owners of these institutions making the loans.
Lower income people will remain at the bottom of the socio-economic ladder if they fall for these products. These lenders are bottom feeders and legally make themselves rich on the poor.
The lending rates on these products are insanely high and if you want to stay at the bottom, keep dealing in these products.
Notice that the companies that sell these products are located only at the poorer end of town. Why is that? Because rich people won’t use these products. That’s how they got to be rich people.
- Myth: rent to own makes you get the stuff you want now.
Reality: rent to own is a ripp-off.
People rent to own items they cant possibly buy because they look at only how much a week they need to pay and think I can afford this. But if you take out your calculator and look at the numbers, no one can afford this.
The average washer/dryer will cost you £15 a week for 90 weeks. That is a total of £1350 for a washer dryer. If you had saved £15 a week for just 12 , you can normally buy the same model at the same rent to own store for £180. Or you could have bought a used set, you can get it much cheaper and then save up to get a good one.
By using rent to own you are being destroyed financially. Why not use cash instead and save thousands a year!
- Myth: 90 days same as cash equals using other peoples money for free.
Reality: 90 days is not the same as cash.
This is just a silly marketing gimmick. 90 days interest free is not the same as cash for two basic reasons:
- If you flash cash in front of member of staff who has a sales quota to meet, you will likely get a discount. If you can’t get a discount, go to the competitor.
- You can’t get discounts by signing up to the finance plan.
Study’s have found that most people do not pay of the debt in the allotted time. After the 90 days, you start getting charged a rip off interest rate of between 24 – 36% pa at most places and they back charge you to the day of purchase.
- Myth: car payments are a way of life, everybody has one
Reality: staying away from car payments and buying a reliable used cars is what the average millionaire does. That is how they became rich
Taking on car payments is one of the dumbest things people do that destroy their ability to build wealth. The car payments is most people biggest payment apart from the mortgage and thus it steals more of your income, than anything else.
Buying cars via payment plans is even worse than rent to own described above. This is because most people have car payments for their entire life. Once they pay off one car payment, they get another want because they want a new car. if you keep car payments throughout your life, you miss the chance to save and invest that money. Just look at this example to see how much money you miss upon retirement by using car payments. The average car payment is about £300 per month. If you invested tho amount monthly in a simple index fund from age 25 onwards, you will have £972,541 by the time you are 65! Is a constant need to get a new car worth £972,541 to you!?!
Buying cars via payment plans is even worse than rent to own described above.
Now I am not saying that you should never have a good car, just sacrifice a little in your younger days so that you can live a financially free life. In your early years ( till 30 years old) drive a good second hand car. This will allow you to put £300 a month form the age of 25 to 30, by the time you are 65, that money will have grown to £325,632. Yes, that’s £325,632 for not having to save a penny after the age of 30 through the power of compounding!