Having been through the mill of having the shackles of debt. I thought I would write-up my experiences of debt so that it will give you some pointers about when to use it and how to handle it. My experience with debt on the whole has been unpleasant, when I started my first business, I didn’t understand money or debt very well.
I have made all the mistakes, borrowing to get a new car, borrowing for luxuries and borrowing to fund a lifestyle. I have made most of the debt mistakes and borne most of the consequences.
Here is what I have learned…
Debt is a tool to help you grow.
How you use debt determines whether it is a good or bad decision. If you see debt as a tool to help you progress in life then it is good. Debt has to been looked on over the long-term. Is taking a £5000 loan for a luxury a wise decision? Is taking £5000 loan to save costly interest on a credit card a good idea? Is borrowing money to support your lifestyle whilst your business is getting going a great way to go? It all hinges on your individual circumstances. If you look at some of the wealthiest people on the planet, they use debt to grow, but use cash to live. Debt is a tool for growth. What does that mean? Well, if taking on debt can reduce your outflow of money or can help you earn more money, then maybe it is a good idea.
Debt has to be managed.
Debt is a long-term contract between you and the lender. Don’t take it lightly. My mistake earlier in my life was taking financial and debt decisions too lightly. Today, I have learned that lesson. I have a budget planner, debt calendar and a debt reduction spreadsheet. All this assures me that at any given moment, I know my own financial position. There are lots of free tools out there to help you, but I simply use Google sheets to help me get it all logged.
Cash will always be King.
The world belongs to those who can pay cash. In the wider world debt is used by those who lack cash. If you really want to do well in life, it isn’t measured by the car you drive or the house you live in, those things can be gained by borrowing money. Real wealth is measured in two ways, how much cash do you have? and if your source of income stopped tomorrow, how long could you live before your money runs out? Debt can give you the illusion of wealth, but cash is always king.
Debt can crush you.
When things got really bad for me financially, the worst thing was the letters and phone calls. At the worst point, I owed £250,000 as a result of a failed business venture. I attempted to fix things by using credit cards and loans to keep the plates spinning. Eventually I couldn’t cope and fell behind. The letters and phone calls started, they continued and continued. By this time, looking back, I think I probably had some kind of mild breakdown. I stopped replying to phone calls, stopped opening letters. Whatever you do, don’t get yourself into the mess I did. There are ways out and talking to lenders is much better (even if it is embarrassing and frustrating). I’ll do some posts about this soon.
When we take on a loan or financial commitment, we should always plan for some degree of negative change in our position. An interest rate rise, a decrease in income or a surprise expense. Make sure you have factored some breathing room into your financial plans. Just in case something changes, you have the free cash to cover your bills and repayments.
Whatever your circumstances, I would advise anyone considering borrowing money to think long and hard before they make a decision. Sometimes, it can be a good plan to borrow money but If it doesn’t work out as you planned, you could be saddled with it for a long time.