Lesson 6 – Do You Really Understand Debt?
In this sixth lesson in the Smart Consumer Skills Guide for Brilliant Kids series we ask you to explore debt and how good you really are with debt. In the last lesson, we gave 5 questions to ask yourself when spending. Debt is extremely important to understand and master. It can help in providing you with a great lifestyle, or can end up being a chain around your leg. It can ruin the rest of your life if a healthy respect is not given to it – it is a double edged sword, which unfortunately most of us do not understand.Debt is something that you will come into contact with sooner or later – the truth is that you need debt to live today – it is a fact of life and you need to be able to deal with it. The world economy functions when money is moving around it. Stop or disrupt that flow and people’s lives are affected by changing prices, changing interest rates, changing availability of goods and services. Debt is used to help money flow around more freely and quickly. It is readily available to all.
If you look at money, well, money itself is no more than an “I Owe You” note. Debt is an extension of this. So you can see that money and debt really are very similar.
What is Debt? Debt is where you borrow money from someone else, so you now owe them money and have to pay it back. This could be parents, friends, other relatives, or from a company. Unfortunately there are some critical differences when borrowing from a company compared to your family or friends.
Debt allows you to buy goods and services that you could not afford normally, or gives you convenience to live your life within a budget – smoothing out the bumps. It allows you to buy other goods, services, and most importantly, income generating assets – we will talk about leveraging in the Entrepreneur series of articles.
When you borrow, a company, such as a bank or credit card firm, will want your money back, plus more on top as interest. It’s their ‘fee’ for lending you the money. This is what it will cost you to ‘buy’ that supply of money. Debt is no more than this – a supply of money – a supply of more “I Owe You’s”, which you pay a fee or a cost to get hold of.
This is the product that these companies are selling you – you are buying a supply of money. What is the selling price? It is the interest you pay. So why treat debt any differently to any other product you may buy when you are ‘shopping’? Apply the same rules we discussed in earlier articles – ask the 5 questions; use the strategies to help you get the best deal.
A company will want the debt repaid in a specific way at a specific time that suits them. This is a legal contract for you to deliver. You have a legal obligation to the lender.
Governments have found it necessary to pass laws that determine how the supply of money is ‘sold’ to you, with various credit consumer acts. If Governments find it necessary to do this, you should realise the serious nature of debt. Get debt wrong and it will cost you a fortune – you cannot cancel debt – it is a legal obligation on you.
If you miss this, your costs will mount up. Let’s not forget: companies are not your friends. When people need to borrow money, they usually go to their bank and expect that someone there will know the best thing for them to do. A bank isn’t there to give advice, it’s there to sell you things and make fat profits. Whether or not to go into debt, and who to borrow money from, are two of the most important decisions you’ll ever make.
As this a hugely important area and no one will sit down with you to independently advise or help with these questions. We thought that it would be more useful for our readers if we spent little more time on Debt with more articles in this area.