If we genuinely want to start our journey towards being wealthy but not just look rich, then we must start with being debt free.
You can’t go bankrupt if you are not in debt.
Welcome to the part 1 of the 2 part series on Debt and how to avoid debt.
In this edition of the Minutia newsletter, let’s discuss why we should avoid debt in order to get started in our financial freedom journey and how EMIs and credit cards instill wrong attitude towards money.
Borrowing money which we haven’t earned yet is debt.
It is not wise to use tomorrow's income for today's expenditure. And tomorrow’s income is not always assured.
Debt is the lifeblood of the banking industry. The banking industry makes money by loaning it out to others. And if that money is spent on consumption rather than creation by an individual, it is a financial trap for him/her.
The irony is that the bank will lend money to those who have a good credit score and steady income, but those individuals don't need loans to begin with.
Loans are only given out to us if the bank feels that we will be able to repay them. We also pay interest on what we owe. So, in this case, the bank benefits more than us.
Debt will put us in negative compounding.
When we owe money to a bank or someone, we work all day and night to repay the loan. We are now earning money in order to pay our monthly installment or interests. We are now employed by our bank or creditor. That means we are not working for ourselves, let alone making our money work for us.
Don't aim for job security. It would never happen. Aim for financial security. It is in your control and you can make it happen. - MuthuKrishnan
The bank or the creditor makes money when we are in debt, so they persuade us to borrow even more through EMI or revolving credit(Credit Card).
EMI and credit cards encourage us to buy on the moment even though we don’t have money. Thus pushing to buy things we can't afford while compromising on our future income, and often times to buy things we don't need.
In fact, we are enticed to spend more and borrow more by the promise of cashback or reward points.
Rational people don’t risk what they have and need for what they don’t have and don’t need - Warren Buffett
We might say a small debt can’t pinch our pocket a lot and can pay it off in no time. But it is enough to get us in a habit of impulsive buying or the habit of borrowing money from our future self by giving us a false purchasing power.
EMI and credits cards are mechanisms designed by banks to earn money out of us by lending money.
So, whenever we are looking for a loan, we must ask ourselves, "How much is the bank making while offering this loan to me?"
No one gets out of debt faster than the person who avoided it to begin with. - Morgan Housel
Rather than taking advantage of the debt for creation, we use debt to consume. And we consume at a promise of tomorrow’s income.
No one ever become wealthy by taking out loans to purchase cars, phones, plots, stocks, or gold.
A business takes out a loan to grow its operations, whereas an individual takes out a loan to spend mostly.
Moving forward in financial life with debts would be burdensome and might require us to compromise on - spending freedom, time, peace of mind.
Debt takes away our risk taking ability while making investments and also some of our investing options. Having options is an asset in money life.
We can’t afford to take bold risks while investing due to debt. Debt snatches this ability from us.
Debt eats up our most valuable assets- Time, Health and Energy.
It may also hinder our self-esteem. We might lose our sleep, peace and happiness when we default enough times on our repayments.
If we don’t have any debt to worry about then we can save more and invest more. We improve our purchasing power. We also don’t have to worry about too many monthly bills.
So If we are in debt then we are postponing our success.
Being in Debt is taking 2 steps foward and 5 steps backward.
Having no debt to repay, gives us the freedom to control where our hard-earned money goes to. We can save that money for any future need or spend it on a good vacation or invest to earn even more money.
Just being debt free will change our perception about money and wealth all together. Most importantly it shows us what real freedom is. And as they say “Once you taste freedom you will not go back”.
Being debt free accelerates our journey towards financial freedom.
So it is wise to avoid debt, EMI & credit card which encourage impulsive buying.
But how can we deal with instances where we need money right away but don't have any? For example, suppose we wish to build a new house on our property but lack the necessary funds. And what if we get into a prestigious educational institute but don't have funds toward the tuition fee? Basically, what to do when we can’t avoid debt.
Let's discuss these instances along with how to pay off debt quickly and how to avoid debt in the part 2 of this series on Debt and how to avoid debt.
Peace out!
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