Try hard to eliminate your debt

THE moment I pose this question to any ordinary human being, the upfront answer which I am likely to get is that it is not possible to have a ‘debt free lifestyle’.

Today’s world is full of opportunities where one of the potential ways through which we can fulfill our dream of driving the most expensive cars or be a proud owner of a spacious house, is by seeking an easy loan or a mortgage arrangement from any nearby bank/financial institution.

The practice followed in olden days is now passé, when loans were expected to be sought mainly by financially weak people. During those days if you come across somebody driving a BMW or a Mercedes Benz on the road, it was presumed to be a wealthy person only.

Things have changed dramatically now, as the current lifestyle of a human being has turned quite deceptive.

The market is flooded with numerous loan options/credit instruments and majority of commercial banks are busy in exploring innovative ways so as to sell their loan products to every possible citizen of the world. In fact, one would be termed as conservative or traditional, if one shows any reluctance towards exercising a loan option.

As a result, most of us have fallen deep into the trap of these so called ‘easy loans’. Often it has been observed that on many occasions we end up taking a loan towards fulfilling one of our ordinary needs, which otherwise we could have easily done away with and that too without making much of a compromise.

But nowadays, the temptation of getting an easy loan is so high that occasionally we sign on the dotted lines without paying much attention to other important parameters of the transaction like–one’s income level, necessity for loan, interest payout, borrowing period, servicing mode, processing fees and many more hidden conditions of punitive nature. But are these loans as easy as they are made to appear in the beginning? The obvious answer is a clear ‘NO’.

The moment any loan is sought, we defeat the first and most important principle of wealth creation. Aren’t we all wanted to be rich and there is only one way to achieve this and that is by continuous creation of wealth.

However, the moment a loan option is exercised; it would lead to one’s wealth depletion and for sure at least not towards any wealth conservation or creation.

This is a simple logic to understand. As there is no free lunch in the world; similarly there is no availability of free money from any corner.

Once you take a loan, there is definitely a need to service it regularly by paying interests as well as re-payment of the principle amount. Moreover, worldwide it is a known fact that generally the lending rate of a bank is higher than the one it pays to its customers on their deposits.

Thus, the spread between these two rates is nothing but a direct earning of the bank. I have come across many people who on one side create some regular savings/investments, while at the same time also service a certain loan out of their monthly disposable income.

At this juncture one pertinent point which they normally forget is on the prevailing rate of returns which they are expected to earn on their savings/ investments vis-à-vis the rate of interest which they are required to pay while servicing a loan.

Remember, when you want to build wealth, the first thing that you need to do is to eliminate your debt. You truly cannot be wealthy unless you have eliminated your debts.

Many people in today’s society maintain multiple credit cards with outstanding balances getting carried forward from one month to another.

This happens without they being knowledgeable on the penal interest as being imposed on such carried forward balances and that too at a very high rate.

If all of your money is going towards debt payments every month, you are not going to be able to save anything for yourself. You need to put all of your efforts into eliminating as much debt as possible early on in the process.

Therefore, before you even think of creating any savings/investments, make sure to first retire all your active loans in whatever form they may exist.

While on the subject, it is also important to offer a disclaimer that from the above one should not get an impression that loans in totality are bad credit instruments.

That in fact is not the case, but what is being stressed here relates to the necessity of taking a loan and its utilization vis-à-vis the income level needed for loan servicing.

If you have taken a loan for buying a car or a house, indirectly you achieve wealth creation by retiring such debts because at the end of loan period, the entire asset now belongs to you.

Although, you cannot attribute your entire monthly disposable income towards servicing a series of loans. In such a situation you end up retiring loans by making a net addition to your existing loan portfolio, as some additional money is needed to run day-to-day affairs and the same would come only by seeking additional loans from some source.

This menace of ‘debt trap’ has pushed many promising citizens towards depression and even lead to committing suicides in some cases.

In fact, the perfect condition under which one should seek a loan is when you are in a position to utilize the loan amount under a venture/business operation that in long run has the necessary potential of generating returns which are comparatively higher than the ones applicable on the loan amount.

This is a progressive approach of seeking loans and I know it is not easy for everyone to practice this way. But that not being the case, at least in a situation of any outstanding loan portfolio, look for all possible ways to retire the loan on a priority basis.

Similarly, if one has multiple portfolios of loans, the priority should be accorded to the one carrying comparatively higher rate of interest.

In such a scenario, do not pay all loans carrying varied interest rates simultaneous but concentrate on paying the one with higher rate of interest, while opting to reschedule other loans during the intervening period.

Notwithstanding the above, the ultimate motto on the subject though remains the same i.e. always work towards achieving a debt free lifestyle.

It is possible if one adopts a disciplined approach and clearly understands the dynamics of the spread which exists between the prevailing lending rates vis-à-vis the expected rate of returns on one’s investments.

Take a loan if it is necessary and work towards utilizing the money such that over a time it generates a comparatively higher rate of returns than the applicable interest rate as payable on the loan amount.

Avoid being trapped into the deceptive world of easy availability of plastic money as attached to many of the most frequently used instruments like –Credit Cards, Debit Cards or Mortgages etc.

Be the master of such credit instruments by effectively utilizing them towards your advantage and do not allow them to ride on you, otherwise it can easily change your role from a master to a servant. Cheers!!!

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Author: Jagjit Singh

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