Does debt cripple dreams? Or is it the very thing that makes them come true?
My first real experience with debt was a credit card I got back in 2003. I was traveling overseas for 10 months, and a credit card was both a way to access funds whilst away and a safety net for if I ran out of cash. Since it was predominantly a working holiday, for the first 9 months I had little use for the card, and what I did put on the card was quickly paid off from my savings. My last month overseas, though, I was on the road and anyone who has ever been traveling will realize how expensive this is.
Two weeks into that final month my savings ran out. That was a bad time to arrive in Copenhagen, which remains one of the most expensive cities I have been to. Thankfully, though, I had my credit card and those final two weeks of my backpacking adventure went smoothly as I simply added expenses “to the tab”.
Upon returning home to Australia, those last 2 weeks would stay with me for sometime (and not just because of the great memories). I had amassed a sizable debt, and it took me approximately 9 months to pay off my expenses from those 2 weeks. At that time I came to regard credit cards as “nasty little things” that charged excessive interest and were impossible to pay off.
Funnily enough, upon returning home I entered the Banking and Finance industry. The few years I have now spent in this industry – in which I have helped people with everything from credit cards to personal loans to home loans to business loans – have truly been an eye opener into the different ways people use debt and the impact it has on their lives.
Whilst I came to resent that credit card debt from my last 2 weeks of traveling, the fact is that it saved my skin and allowed me to have fun during a once in a lifetime experience.
Many people come to hate the debt that hangs over their head but, lets face it, many of the large purchases in life – the new car, new house, or new business – would be impossible without being financed by debt. By allowing people to make purchases today that ordinarily they could not afford, debt plays a crucial part in helping dreams come true.
Further to this, many people successfully use debt to make money. For those who know what they are doing, gearing (borrowing to invest) plays a crucial part in magnifying the returns on their investments (it can, of course, also do the opposite).
For many people, debt is an experience similar to the one I had trying to pay off my credit card. They feel trapped making the repayments on their loans that seem to be forever accumulating interest and which take a sizeable chunk of their paycheck each week.
How does such a situation arise? There are many reasons, but 3 of the main ones are:
- Emergency situations
- High housing prices
- Uncontrolled material desires
As the above reasons indicate, sometimes there is not much that can done to avoid taking on large amounts of debt. Unfortunately, though, I see too many people overextend themselves. Instead of taking into proper consideration how much they can afford to borrow and still live comfortably, they automatically borrow the maximum amount the bank/ credit union is willing to lend.
What does all this have to do with dreams? Well, when money is scarce it is common for a person to forget their deepest dreams and desires for the more pressing issue of how to make their next mortgage repayment. Also, I’m sure there are many people who feel trapped in certain careers because they need to continue earning a certain income to service their debt.
So to return to my original questions, does debt cripple dreams? Or is it the very thing that makes them come true?
The truth of the matter is this: debt itself is neither good nor bad. It is the way in which a person uses debt that is good or bad. Debt can help you turn a dream into reality, whether that dream is a new car, a new house, a new business, or an overseas adventure. If, however, you do not use debt wisely then it is likely you will come to feel trapped by it.
In my mind, the key is using debt wisely is this: personal responsibility. This, in my opinion, has 2 elements:
- Financial intelligence: unfortunately schools don’t teach financial intelligence. It is therefore up to you to take personal responsibility for your own financial education. Building your financial intelligence is crucial in ensuring you use debt wisely.
- Controlled spending: this means living within your means and limiting your materialistic desires to what you can comfortably afford.
So to sum up, it is possible for debt to play a positive part in your life by helping your dreams become reality. It is, however, your responsibility to ensure this happens.
Photo by Images Money