When it comes to achieving financial success, paying off debt quickly is crucial. The allure of taking on debt to buy a car or live a more luxurious lifestyle can be tempting, but the true costs of debt can have long-lasting consequences and make it difficult to stay on top of your finances. By prioritizing debt repayment, you can build a strong financial foundation and work towards achieving your long-term financial goals.
Living below your means is one way to avoid debt. By spending less than you earn and saving the rest, you can avoid the trap of justifying any type of debt. However, there are certain situations where debt may be necessary, such as taking out a mortgage to purchase a home, a car loan to purchase a car or a student loan to pay for education.
But even in these situations, it’s important to be cautious and avoid taking on more debt than you can handle. Justifying debt can be tempting, but it’s important to remember that debt comes with a cost – interest. By paying off debt quickly, you can save money on interest and have more money to save and invest for your future.
Is there an exception to this rule? Two assumptions need to hold true:
- The interest cost is constant (no risk of upward fluctuations) and
- You can earn more on the money to pay off the debts than actually paying off the debt, i.e. instead of paying off a debt which has an annual interest cost of $50, you invest that money and generate an annual return of say $100. This would be worth it, clearly!
Interest-free loans may seem like a good option, but it’s important to be confident that you can pay them off before the interest-free period ends. Otherwise, you could end up paying a lot more in interest than you initially anticipated. Tricky, tricky! The current trend of parking purchases under “Buy Now, Pay Later” can truly be a dangerous way to live if you don’t have loads of self-control.
The scariest part to me is having multiple purchases under interest-free loans that can add up quickly and make it difficult to keep track of your total debt. You’re never going to know your true net position unless you actively monitor and track it.
How about rolling over debt from one interest-free loan or credit card to another? Debt’s still there! So still ain’t great but now it takes more monitoring or it may result in missed payments or late fees.
What we practice and teach the kids – Avoid debt where possible, pay in cash / credit card, always pay credit cards in full and spend only on what is needed. And most importantly – If you need to take an interest-free loan for a purchase, can you delay the purchase until you have enough money to afford it?
In the end, the true costs of debt can be deceiving, and it’s important to be cautious and make informed decisions when it comes to debt. Don’t fall into the debt trap and suddenly wake up one day swimming in an unmanageable debt size. As in most instances, prevention is certainly better than a cure!
