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"Rhino" - 17century
slang
for money
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Debbie Baker
Posts:109
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| 23-11-2007 8:19 AM |
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Borrow money and the cost of pay back is high - very high. No extortionately high.
In the Western World, people buy things they do not need with money they haven't got.
It's a remarkable situation and one that has bemused me for the past fifteen years. It is clearly unsustainable. People live their lives as if they can spend more than they earn and somehow believe they will never have to pay it back. Maybe they will die before they do - who knows.
For the current generation, wealth is measured by how much money they COULD spend on their credit cards if they chose to, not by how much real money they have in the bank. When a banker gives you a £1,000 increase on your credit limit it is not the same as having a thousand pounds in the bank that you have earned.
The situation is all the more remarkable because I know that every reader is now thinking, "£1,000. I couldn't do much with that".
Most people's lives are driven by debt - which is why they go to work.
Our parents went to work to pay for the future, but we go to work to pay for the past.
We are slaves to the money we spent LAST year and the year before that. We are slaves to the credit card, slaves to the standing order and slaves to the direct debit.
The cost of credit is massive and, surprisingly, most of that burden is shouldered by poor people.
If you are not sure if you are poor or not, simply work out how many pay packets you could miss and still survive.
For most people the answer is none. If the answer is one, you probably think you are pretty well off. That's how bad it has got these days.
To achieve financial freedom you have to go one step further than your parents - now, the first step on the ladder towards being rich , is to get to the point where you have no debt. It's probably the biggest step on the ladder - simply because it requires a huge change in attitude.
People always think financial freedom is about having a lot of money but that would be to miss the point completely.
Having money in the bank is not what makes you rich. It is not having debt that makes you rich.
I have rich friends, very rich friends and obscenely rich friends. How much they have in the bank is academic if they are not spending it.
Their freedom comes not from having the money, but from not having the debt.
If you are a new reader no doubt you will be thinking, "Yes, but I could live off the interest if I had lots of money in the bank".
Sorry, that's simply not true.
Any interest you may get on your savings is lost almost entirely through tax and inflation. The number of pounds you actually own might increase, but the value, i.e. what it can buy, roughly stays the same.
If you are not sure about this concept, think what a million was worth ten years ago with what it is worth today. Think what a loaf of bread and a bottle of milk cost ten years ago. For that matter, think what a loaf and a bottle of milk cost LAST year, never mind ten years ago.
Do you believe statistics that tell you inflation is around 2 per cent?
According to new research commissioned by The Daily Telegraph, middle-class households face inflation of as much as 7.2%, that's double the average wage increase over the last 12 months. Petrol and food prices are the chief culprits, rising in tandem with higher oil and global soft commodity prices. Petrol prices were up 2.8% last month, with the average litre now costing over £1 for the first time ever. Overall food prices are up 5.1% on a year ago, with meat prices up 4.6%, dairy products 11.3%, and flour 30%.
So clearly, borrowing money to buy things you don't need is a bad idea then.
I call this "bad debt".
It is bad because the price you eventually pay for whatever item you bought is massively higher than the ticket price. More importantly, the item you bought is valueless within a year - often sooner.
Now compare this with borrowing money to put into something you think might go up in value.
Of course, businesses do this all the time.
They invest in themselves - believing that the profits of the company will be far greater than the cost of the loan. Many are correct and go on to make fortunes that they would never realised if they hadn't borrowed in the first place. Others will be less fortunate.
So does that mean that there is such a thing as "good debt"?
I believe that the definition of good debt is "borrowing money to buy something that will increase in value so much that the debt itself will become insignificant".
In this category you may put things like antiques, paintings and of course, property.
The problem is, of course, no one knows if these things will go up in value, nor whether the increase will make the debt insignificant or not.
Property has worked exceptionally well for a lot of people and the capital gains we have seen over the last twenty years have certainly made the price of the original mortgage insignificant.
But the big issue here is not so much the issue of debt, it is the issue of who pays that debt. Most debt requires the borrower to repay the debt. With property we get someone else, the tenant, to repay the debt for us.
It is not a small difference - it is a colossal difference. In fact the argument is so strong that even without capital gains, if the tenant eventually pays off your loan you have just acquired a property for nothing.
That is why a brand new car bought on credit will cost you an absolute fortune, whereas a property costing ten times as much can cost you nothing at all. The question you must always ask is "Who will pay off the loan?"
People waste thousands upon thousands of pounds on cars (and the like) and don't think twice, simply because the numbers seem small and manageable to them. Then they baulk at investing in a two hundred thousand pound property because the numbers seem so big and scary.
It all comes down to what you are comfortable with. Most people are perfectly happy owing twenty thousand on credit cards and loans which THEY have to pay back. But they are uncomfortable owing five times that amount when someone else is paying it back.
It's a funny old world.
With thanks to Inside Track |
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Kind Regards
Debbie Baker
Tip Consultancy - Financial Recovery Specialists
07790 533884 |
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