By elmads

Debt has been called the modern day slavery, but I beg to differ. It is both chaos and peace. It can make the rich poor and the poor rich. It hasn’t have the control on people, but people always have the control on it. This is why Debt is not Good nor Evil, it only turns into either of the two depending on the person who possess its power.

Debt has been a part of the human race since time immemorial, studies and research have confirmed that debt was practiced by our forefathers as early as the barter trade era. Our ancestors had their own way of indebtedness, a verbal agreement to take something today in exchange for a specified food or item in the future.

Even with the invention of money, debt has never changed its purpose. It has been a means to attain something now without paying a corresponding amount or item, but with the promise to repay it at a later date. An agreement based on trust between two individuals, the Lender and the Borrower.

Believe it or not, without the creation of credit, we wouldn’t be having the thriving world economy that we have now.

Debt itself is actually not bad, as long as the borrower pays back what they owe to their lender. That’s the beauty of debt with trust, discipline and commitment. Unfortunately, that way of transacting seldom happens, because some people fail to fully repay what they owe. Is debt the one who is at fault here? definitely not, but the blame doesn’t fully fall into the person who is indebted, because life circumstances play a major factor in it. On the other hand, persons who are fully capable to repay their debt but still somehow do not repay it, is a different story.

We have to look into the reasons why people go into debt, because we could learn some points from the experiences and mindset of others.

Reasons Why People Acquire Debt

1. Financing –
   This is actually one of the reasons why people go into debt. The only way that a person could have money is through, attaining employment and have a steady source of income. That salary will be used for a specified purpose in our lives. To pay for our essential expenses, our personal wants and future goals. Financial goals such as for holidays, to start a small business, to purchase a car, a home, a gadget, have a protection fund and many more.
   
   That being said, the usual problem that arises is when their salary is too low to finance their basic necessities of life. That’s where going into debt becomes an option, as a way to supplement their low salaries.
   
   On the other hand, there are individuals who have enough money to sustain their lives, but still go into debt for their own personal wants. This is a debateable matter because some of our personal wants are for personal growth, but others aren’t. What’s important is to have our own self awareness and critical thinking if debt will be wise for us to take for a certain endeavour that we have in mind.
   
   I’ve made a blog that directly talks about the “Psychology behind the Excessive Spending Habits”.
   
   
   
2. To Have It Now –
   As what it literally means, to get what we need now. There are a lot of scenarios for this, but one of the most popular that I have noticed is during price sales. It is natural for people to want to buy products less than its retail price, that is why price sales have been a significant part of retail companies’ strategy.
   
   This compel people to spend more money on things that they deem cheap. Sure, there are individuals who are strategic about price sales by purchasing the products that they need only when it is marked down. Sadly, not everyone is like that, most people purchase items that they do not actually need, but still do so just because it is on sale.
   
   That being said, other people who do not have any money to spend at that specific moment in time will be willing to buy goods on credit. Also, the FEAR OF MISSING OUT (FOMO) is a real phenomena. That’s how companies entice everyone to spend more either with saved money or credit.
   
   Unfortunately, due to the accessibility of credit, people find it easy now to just keep on buying things without a second thought.
   
   
   
3. Emergency Cases –
   There are life circumstances that put pressure to an individual, like what we just had in 2020, which we actually still have and that’s the COVID19 pandemic. No one expected this unfortunate event to happen in our world, a disease that infects everyone in such speed and accuracy.
   
   Some individuals who get infected by the virus will need to be hospitalized due to their moderate to sever symptoms. Unfortunately, hospitalization in most countries are not free, and being admitted in a hospital will have a corresponding amount of money that needs to be paid. Not all individuals will have money saved for it, that is why going into debt will be of significant help for them.
   
   Furthermore, job layoffs are included as well in this category. The reality is, not everyone saves money when good times are rolling. Going into debt is the only choice when crisis happens, there’s no other choice.
   
   Learning the hard way is still a learning curve. A positive perspective is and will always be important.
   
   
4. Low Interest Payment/Investment –
   Paying low interest with debt is absolutely fantastic, this is because we will be able to leverage it by using that debt into acquiring cash flow generating assets such as real estate and businesses.
   
   For instance, if our investment generate returns of around 6% yearly and consistently, while the interest we need to pay for the debt we acquired is only 2%, then the difference between the two is 4%. That means that we gained money as long as we have greater returns on investment than the interest we pay with our debt.
   
   Nonetheless, using debt in this way is a double edged sword. If we are not disciplined and strategic in using it, then it’ll just cause massive losses in the long run. Yes, the returns are way better when debt is added into the mix but it can also be deadly when things go the other way. Just like what I’ve said on one of the lines in my Debt Riddle, “it can make the poor rich and the rich poor”.

The Important Factors needed to be able to Repay Debt

1. Steady source of cash flow –
   If a person has a steady source of income such as employment, then that gives a higher chance for them to repay all of their debt.
   
   
   
2. Discipline to repay debt –
   Some people have a steady flow of income, but still fail to repay their debt because of certain personal choices that hinders them to allocate money for debt repayment. This is the reason why banks have what you call credit ratings, to track the debt repayment history of a person. It also gives a snapshot on how disciplined they are into paying their debts. Being disciplined to repay what we owe to others should always be our priority, because it also reflects how responsible we are with money.
   
   
   
3. It will always be a liability –
   Understanding that an indebted person will have a tail. A tail that will never go away not until they clear their debts. The mere fact that we are paying interest payments for our debt should already be a deterrent for most of us, or for us to have a sense of urgency to repay it as soon as possible. People always complain when they see products and services price go up but are willing to pay regular monthly interest payment for the debt they acquired. The moment we realize that debt will always be a hindrance into achieving our financial goals and independence, the better.

Debt as a thief

In our current society, debt has been a normal part of our day to day living and transactions. Nevertheless, people forget that debt is liability in which we owe someone for something we have taken today. That means that we need to save more and spend less to just pay for that debt in the future.

Acquiring debt, is us getting an advance in our money from our future selves, which is not that bad because it’s just an advance in our salary. Yes that’s true if we look at it in that point of view, but we should not forget the thief that lies within debt, its interest payments. We ourselves are agreeing to steal a part of our income in the future to finance our current endeavour. That is fine if we will be able to use debt as an asset to generate more cash, but that is unlikely for the most of us.

People need to be aware of this fact, that we are absolutely stealing a significant portion of our future income from our future self. This directly goes against saving and investing money to secure our and family’s future.

To sum it up

Debt has never been the problem, the people acquiring the debt is. These are the individuals who mishandle debt and are not able to properly leverage the additional power that it grants to them. There are certainly a lot of things that we cannot control in our lives, this is the reason why sometimes debt must be obtained, but those uncertainties should be the main reason why we need to take saving and investing money seriously and strategically.

We must save and invest for the unpredictable instances in our lives, it doesn’t mean that we must restrict ourselves and not enjoy life. That’s why we have the action called budgeting, this give us the ability to enjoy and cherish life while being able to cushion ourselves from the unforeseeable and unfortunate life events that can happen to us. By doing so, we protect and cushion ourselves when life punches us straight on our faces.

“The amount of energy we spend on things that we can’t control vs being accountable in what we can control will always be the huge separator in the trajectory of our lives.”

Gary Vaynerchuk

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.