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Lesson #2
SPEND WISELY AND AVOID EXPENSIVE
CONSUMER DEBT
In this module, we
are going to learn how to spend wisely and avoid consumer debt.
Earn more than you
spend.
“Annual income twenty pounds, annual expenditure nineteen six,
result happiness. Annual income twenty pounds, annual expenditure twenty pound
ought and six, result misery”.
Charles
Dickens, David Copperfield
Spending wisely means living within your
budget, buying the things you really need and not indiscriminately
shopping for things you want.
Consumer
debt
“Borrowing money at 18% to buy consumer goods is dumb”
Warren Buffett
The legendary investor Warren Buffett, whose Berkshire
Hathaway company owns banks and credit card companies, actually warned
investors against carrying a credit card balance!
Millions
of Brits and Americans carry a permanent balance on their credit card –
before the covid crisis, 110 million American had credit card debt paying a
crippling average rate of 16%.
“You can’t
go through life borrowing money at those rates and be better off,” Buffett added.
Buffett
said that an old friend of his who came into some money and asked his advice on
what to do with it. He asked if she had credit card debt. She said she did, and
was paying an interest rate of about 18%.
“If I owed
any money at 18%, the first thing I’d do with any money I had would be to pay
it off,” Buffett advised her.
By paying
off the balance, she would save more money on interest than any return she
could earn by investing the money, whether in the stock market or in real
estate or elsewhere, Buffett advised. He added, “I don’t know how to make 18%”.
If one of
the greatest investors of all time admits that he cannot make more than the
rate charged on a credit card, what makes you think you can?
You should
still keep some money aside for a rainy day, but pay down expensive debt rather
than keep cash in the bank earning less than 1% and don’t buy stuff which go
down in value using credits cards.
How much
are you paying each month on your credit card bill?
Chances
are, you are paying the minimum amount required.
Paying the
‘minimum payment’ on your card balance will take between 10 and 20 years to
clear the debt depending on the interest rate charged?
This
practice is highly profitable for the card companies and extremely costly for
consumers. UK card companies are now required to warn customers about the cost
of paying off the minimum amount required.
Check your
credit card statement now. If you are just paying the minimum ‘default’ figure,
increase this immediately to a higher amount you can afford, or clear the
entire balance.
Questions
to consider
How much interest
are you paying on your credit cards?
How do you
use your credit cards?
How much
do you pay off each month?
Would you
still buy that gadget or item of clothing if you had to pay for it in cash or
straight out of your bank account?
Albert Einstein said ‘compound interest is one of the most
powerful forces on earth’.
Using compound interest to your advantage in
saving and investing, will make you rich. Used against you by borrowing, it
will make you poor and someone else rich.
At an
annual interest rate of 18%, how long would it take for the investment or debt
to double?
The Rule
of 72.
The Rule
of 72 is a simple way to determine approximately how long an investment
will take to double given a fixed annual rate of interest. By simply
dividing 72 by the annual rate of return, you can obtain a rough
estimate of how many years it will take for the initial investment to double.
72/18 = 4
In other
words, a sum of money invested at 18% pa will double approximately every four
years.
Similarly,
a debt with interest rolled up will double in four years.
You can
see how powerful compound interest is when applied to debt. The average UK
mortgage holder will pay over half a million pounds in interest over their
lifetime.
Summary Lesson
2
The first
step to becoming a SMART MONEY MANAGER is to spend wisely and avoid
expensive consumer debt. By taking this step alone you will see a dramatic
improvement in your financial and emotional wellbeing.
It’s not about how much you earn, but how you manage your money
that counts.
You could earn more money by getting a pay rise, but unless you
change your money habits, you’ll soon be back where you started.
Action Steps
Think about how you spend your money.
Start making a list of all your income and expenditure using your
bank and credit card statements including all the standing orders and direct
debits. You can use a notebook, spreadsheet or a smartphone app to keep your
record.
Your list of expenditure will fall into two categories – Fixed and
Variable.
Fixed costs, which can include:
·
Rent or mortgage
·
Food shopping
·
Utilities and energy
·
Regular bills
·
Club membership and subscription payments
Variable expenditure, which can include:
·
Clothing, coffees, drinks and treats
·
Meals out and takeaways
·
Repairs
·
Any other stuff you indiscriminately buy on a
whim or because it’s ‘on sale’.
Simple money saving tips you can use right now.
If you are running short every month, think about where you can
make savings.
There are so many ways of making savings from switching utility
providers to finding a better loan or mortgage deal. Switching mortgage deals
has saved me tens of thousands of pounds.
Here are a few simple money saving tips:
Cook your meals and cut back on eating out at restaurants and
buying takeaways. Prepare proper meals using fresh ingredients instead of
buying more expensive, and less healthy, ready microwavable meals?
Drink less alcohol. How often do you go to the pub of
bars and how much do you spend on a night out?
Buy less coffees and make your own. How many visits to
Starbucks do you make each week? You can make fresh coffee for a fraction of
the price of Starbucks.
Save a fortune on credit card interest. You can
save by switching to a lower rate or interest free deal which can help you
increase your payment towards reducing the balance. Just Google ‘best credit
card deals’ and you’ll find hundreds of offers which can save you money.
Use cards only when necessary and try to clear the balance in full
each month to avoid interest charges.
Review insurance every year. Insurance companies make it easy to
auto-renew your household and motor insurance every. Making the effort to shop
around could save you hundreds of pounds.
Review your mobile phone contract and utility providers.
Reviewing your phone contract or plan is a great way of saving cash and you
don’t have to change providers. Call your provider today.
Your expenditure list will immediately help you identify any
obvious targets for cutting back, like that subscription you no longer need or
the recurring payment you’d completely forgotten about – we’ve all been there.
I cover many more money saving ideas in my free Money Tips Podcast.
I’m not saying you should give up having fun and live a reclusive
life living like a miser. You can enjoy life more if you live debt free within
your budget, save for the things you really want and increase your income when
you want more.
You don’t have to follow the “I want it now” crowd!
Thank you for listening and congratulations on completing
this module. In the next module, we will cover further steps on managing and
respecting your money.
Would you like to learn how
to become financially free without working any harder and spending your life
exchanging your time for money watch this free
on demand training now to learn how to become financially free
without working any harder.
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