3. Today’s debt = spending tomorrow’s income

Are you still tracking your incomes and expenses? Do your expenses fit in your income? Have you listed your longer term expenses? Thinking about your future expenses is like looking ahead… you can see the problems before bumping into them. 

 

Keeping the balance can be hard when we have lots of expenses and only a small bike (income) to carry them.

 

But what happens if we lose balance?… Losing our ‘money balance’ usually means … borrowing, i.e taking a loan or debt, because if our expenses are bigger than our income, the money to pay for these expenses… needs to come from somewhere. What does ‘a debt’ mean? Taking a debt today is spending tomorrow’s income in advance.

 

Imagine your income is a cake. Today your cake is not enough… so you borrow an extra slice.

 

Tomorrow, you need to pay it back. How can you pay it back? From the money you have: your income and/or your savings. So tomorrow, you eat less …because one slice… is to pay back your debt.

 

Today’s debt is spending tomorrow’s income. Debts can be manageable when our incomes grow… but debts become a nightmare when 1) our income is stable, or irregular, or going down, 2) when the debt grows because of interest, 3) when other unexpected expenses eat up our income. Debts put pressure on our future… so always think how you will pay back BEFORE taking any loan.

 

 

Today’s lesson is a bit longer – let’s look further at interest. Interest is a man-made rule that makes debts grow over time. So if I borrow 100,… I will have to pay back 101 or 110, or 106… it depends on the rate. Interest puts even more pressure on your future. If you have to take a loan, 1) think of how you will pay back BEFORE, 2) try to find a no-interest alternative.

 

One more thing to be careful about is that unattended debts grow quickly. Interest is like weeds, or mice… If you don’t chase them out (don’t pay them), they keep growing or breeding… and very quickly your house has mice all over.

 

Why? Because interest that is not paid in time becomes a debt, that breeds – that generates interest, so if you don’t pay your debts in time, they keep growing. Unattended debts grow very quickly.

 

Homework: list all your debts. Make sure all your debts are written and signed by your lender and you.

 

 

Debts are too serious not to be written… and managed carefully. A bit like a fire. A fire can be useful to cook and get warm… but if you don’t look after it, it may burn your house down.

 

It is the same for debts: don’t let your debts burn your income and more.

1. List all your debts – even with your family, and “small” ones (unpaid or “forgotten” debts can fuel resentment between people…): amount, date, how much you have paid back, how much you still owe, instalments (i.e. the amounts you pay back – how often and how much), and the interest rate if it bears interest. If you are not clear on some of your debts, it is never too late to clarify – usually unclear things (especially about money) don’t get clearer over time… they get murkier. So clean up your list. This list will be also very useful when (in a few lessons) we will put all the pieces of our money jigsaw together and plan ahead (budget).
2. Many of us don’t like maths… but if you can, try to understand the maths behind interest. Let’s take a very simple example: you borrow $1,000 and the interest is 10% – per cent means “for every 100”. The first question to ask is whether this 10% is yearly, monthly, weekly… daily? (You need to be clear). Let’s say it is monthly.

After one month, how much do you owe?

Let’s say that … 🙁 you don’t have the money. You negotiate with your lender who agrees to wait for another month. So, at the end of the second month, how much do you have to pay?

 

Questions? Post them in our forum (top right button).