The problem with debt, and the reason so many people struggle with debt for a lifetime, is that its impact on one’s financial situation is insidious. It’s not obvious how damaging it is just by looking at any single loan in isolation or the rate of interest on that loan or even the affordability of the monthly repayment. The financial slide backwards is gradual but incremental. To gain a clear appreciation for the stealthy but substantial impact of debt on a person’s overall financial wellbeing, it’s necessary to consider an extended period.
To illustrate the point, consider two friends. To intuitively identify who is who, we’ll call them Borrow and Save. Borrow and Save are identical in almost all respects – they earn the same salary, they get the same salary increases, they desire the same things in life, they therefore spend the same amount on the same things, they do everything exactly the same – except for one important difference, their attitude towards borrowing and saving.
Borrow gets a credit card before she even receives her first pay cheque and she splashes out on a new outfit and a small car to get to work (this is before Covid-19 struck). Save is envious but she has a plan. She wants the same things as Borrow but she delays buying them for just 12 months. Crucially, she works out what she would have paid in loan repayments each month and she saves this amount in her savings account instead of spending it on other things.
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