In case you missed the last emails, the current thread is about stress caused by financial problems and what you can do about it. Because as I said in the first email, stress-relieving methods have their limits and the best thing is to get rid of the stressor, the thing causing the stress. That’s what this thread is about.
Today we’ll look at the causes of being in debt and what you can do about it.
We’ll start with some basic economics and math. But fear not, I love explaining things in simple terms so even a 6 yo could understand it. I hate it when people overcomplicate things.
At one point in our life we started with this simple formula:
incoming money - outgoing money = leftover
Incoming money can be your salary, money from a business or anything else which brings money in.
Outgoing money is all spending you make, be it for utilities, groceries, a new computer, clothes or whatever. Whenever you swipe your credit card it is outgoing money.
If the leftover is negative, we are in debt. We somehow overspend. And someone lends us money to do so, i.e credit card companies and banks or your parents as a kid. And maybe, except your parents, want their money back.
After this initial start, our formula changes slightly because there is always a leftover. We do not start at zero again. So, it looks like.
previous leftover + incoming money - outgoing money = new leftover
This is a simplified formula of how we are running our financial lives. If we made debt in the previous round, it will hit us here again. If we make now debt again, we will hurt us in the next round aka next month. However, there is a catch to it when it comes to loans. We’ll cover that in a minute.
To change this formula to our benefit, we can adjust two parts. Either bringing more money in or spending less. And of course, we can do both.
I think we all can do the math and see that if we overspend continuously are leftover is always negative. If we have saved up money in some round before that be work out to overspend occasionally. As long as the total leftover you accumulated in positive.
However, if we do this every single month, we have a massive problem.
The easier way out of this and what you should start with is lowering your expenses because you have full control over them. Nobody except you and maybe your family are responsible for that. The less money you spent the more money is left over from your income and the faster you have paid off your debt.
The hard thing about this is that you need to change your behavior. Because your current behavior got you into this problem and it will never get you out of it.
Minimalism and mindfulness are two good starting points to change your behavior to something more favorable for you.
Now to the catch with the loans. When you overspend at some time in your life, you have to loan the money from someone. Most of the time, it’s your bank or credit card company. However, they are not lending it you because they are so nice and love to help you. Nope, it is their way of making money.
They take an interest rate on whatever they lend to you. And this is the one thing that is killing many people with their debts. They don’t get the downsides of interest rates. Let’s say you lend 1000$ for a year and they take a 10% interest rate. If you can repay it this year, you paid a total of 1044$.
If I can’t repay it in one year but need 5 years, the sum I have to repay changes. It’s 1260$ now.
When you start to miss payments, get late fees and increase the repayment period, those numbers will increase drastically. And with it, it gets harder and harder to repay it.
And exactly those interest rates are killing people. The longer it takes you to repay, the more you pay in total sum.
This might work if you only have a single mortgage and no other loans. Have a healthy stable income, etc. But many people do have more. They go shopping and shopping and “suddenly” have thousands of dollars on credit card payments. which they can pay back and get hit with the interest rate truck.
If you are in that situation, there’s only one goal and you must adjust your behavior to archive that.
Paying off your debt is your number one priority in this situation.
And the key to that is changing your behavior, especially your shopping behavior. Because you have control over it. It is important to remember that. You have control, you can fix It.
Do that and sprinkle in some tactics and you can become debt-free. I know you can do it. Go, go, go!