I hate debt!
My hatred is probably rooted in my childhood. I always heard about this or that loan my parents took and I could see that they were distressed as a result of debt.
A person might be borrowing money, most possibly to buy stuff, which they currently can't afford because they could not be bothered to save for it. The real question is if they could not be bothered to save for it, why do they think it is acceptable to borrow money and pay interest to own that stuff.
Interest rates on some of the loans are no laughing matter in the UK. Frequently, banks will push loans with over 20% interest rates on them. Banks are only half bad. There are payday loan providers who go into 1000% and higher. I took an unsecured loan from my bank at around 26% interest rate pay year to buy a car. They were so nice to me that they gave me more money than I asked for. I was a sucker, don't you be one.
I was focused on this nice car and spare cash I will have. It wasn't even that nice in retrospect. It was an old Honda civic, but for a guy on just above minimum wage, it was a great car.
I regretted borrowing that money for a long while. Let me tell you how much it actually cost me.
£3500 over three years at 26% costs £4899.60 - nearly £1400 in interest alone. When I look at this now my stomach turns. I gave that money away to the bank because I could not be bothered to save it. To be honest it didn't cost me that much because last year of the loan repayment I started paying it off aggressively to get rid of it as soon as possible and pay as little as possible in interest. By the time I paid off the loan I was done with car ownership. I ended up getting a little 125cc Honda motorbike, which was incredibly cheap run. I sold the car for £1000. That was about twelve years ago I am slightly smarter now.
That situation taught me many things. One - the bank will lend you as much money as they can for as long as they can, so you can be paying them back with interest as long as possible. Two - never borrow money for items that depreciate rapidly. I borrowed £3500 to buy a car that only cost me £2500. I blew the rest and sold that car for £1000 a couple of years down the line. I lost around £3500 in those two years as a result of my stupidity. I said it before, I was a sucker.
If you're interested to see what you might be paying back to the bank if you took loan play around with loan calculator at the bottom of this post.
So, if you already have debt how do you tackle it?
There are two schools of thought, one based entirely on psychological aspect the other purely mathematical.
The psychological approach states that you should pick whatever loan has the lowest balance and focus your efforts on paying that loan off. The idea is that paying one of the debts off will help to motivate you to keep going at it.
The second method states that you should look at all of your loans and order them by the interest. You should then focus on paying off the one that has the highest interest rate.
which method you decide to use will depend on the amount of debt, your psychology and amount of loans. If you have debt, face it and make a list, look at it and decide how you will tackle it. The worse thing you can do is ignore it and hope for the best - you need a plan! Whichever method you decide to use, one thing is sure. You should focus on eliminating that debt as soon as possible. This might be obvious, but what is common knowledge is not always common practice. In order to pay off that debt you may need to find some funds. One way is to look at your spending and decrease it. Second method would be to earn more money. I will have additional blog post on alternative sources of income and will link this here when I write it, but there are many methods to earn a little extra money on side. Some much easier than you realize. Let me know if this is helpful at all and tell me what is your situation, what are you struggling with?
If you wanted to read a bit more about personal finance to help yourself get out of debt and start working on your future see below for my book recommendation.
My name is Witold, but I call myself a frugal alien on this blog. Why? Because I feel like one when talking to people about personal finance. I write about financial independence and ideas surrounding it whilst embarking on that journey with my wife.
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