A Series on Debt by Makgaje the Money Buff.
In this article, I outline how we trap ourselves by using credit incorrectly.
Debt was never meant to feed our lifestyles but was meant to make us wealthy. South African consumer debt is sitting on approximately two trillion rands, and we need to fix this mess.
The purpose of the series is to understand the impact of the choices that you make and how they tie you down for a long time.
Firstly, understanding how banks, and other lenders, make their money should provide a bit of perspective on why financial institutions make tonnes of money. Simply put, they lend us money and charge INTEREST.
For example, if I borrow R100 000 and the Bank charges 10% interest then I am going to pay R110 000 back. So the Bank gains R10 000 from lending me money and I “lose” ten thousand rand from my pocket.
Now Why is this a “Loss”?
This depends on what you are going to use the money for.
If you are buying assets that generate more income than the interest payments, then, by all means, use the Bank’s money to build your wealth.
However, if you are borrowing money to feed a lifestyle, then those interest payments are indeed stealing money from your future. You deny yourself the opportunity to turn the R10 000 into an asset.
You could have used that money to fund something important or valuable in your future instead you are making the next person wealthy.
Remember there are people behind the Bank who benefit from these transactions. So you are literally stealing money away from your future and handing it to someone to build their future and legacy.
Good vs Bad Debt
The trick is to learn to differentiate between good debt and bad debt.
Good debt is used to buy assets, for example, a home, a car that is used in the generation of income, study loan and business loans.
Bad debt is used to fund a lifestyle.
Once you get into the habit of taking loans to feed your lifestyle then you will keep working for debt like a hamster on a wheel due to the amount of time committed to the loans.
It takes a long time to pay debt because of COMPOUND INTEREST (I will explain this in the coming articles).
If you do not have the capital that you need right now then the loan repayments, which include interest and capital, reduce your disposable income and this does not allow you much freedom to save.
This is how the investors at the Bank then capitalise on our inability or failure to save.
They have saved money or invested in assets that allow them to generate money, and the more they lend us money the bigger the pool to lend more.
Is it Impossible to Live Without Debt?
So, someone might say that it is impossible to live without debt, but the truth is that consumer debt was never available until the 1950s.
Loans we meant for business working capital, or convenience. It makes sense because the return on investment on successful businesses is more than the interest payments.
Learning why some products were developed is a clear indication that they were not meant for private consumption.
What we need is a culture of saving so that we spend our own money and keep replenishing it to avoid borrowing.
Conclusion
This article is a summary of the YouTube video called How Interest Steals Money From Your Future. The channel is called The Power is in Your Pocket and the link to the channel is https://www.youtube.com/c/ThePowerIsInYourPocket.
The link related to this article is: https://youtu.be/XzBY0tS5aKc
About the Author
Makgaje Setlalentoa aka Makgaje The Money Buff created a YouTube channel to feed the desire to improve her viewers’ quality of life through sharing her knowledge and experience in finance. Her educational background; experience in Private Banking inspired her deep passion for personal development, wealth creation, and the continuous development of the African continent.
She majored in Statistics, Economics, and; Money and Banking in her undergraduate studies and also completed a Honours in Economics.
She was a Private Banker for the last four years she worked in corporate and, in 2015, was awarded Private Banker of the Year in the Johannesburg Area, South Africa. The primary goal of private banking is to create, maintain and preserve wealth. Everybody deserves this knowledge from the first Rand, Dollar, etc earned. Her objective is to provide unbiased financial knowledge to empower consumers to make better financial decisions.