Pertinent questions that surround debt.
Mackeus Nguni
(Author of Money Mind)
1. What is debt in the world of finance?
If we go by the simple definition in Oxford Advanced Learner's Dictionary, we will define debt as "a sum of money that somebody owes." In a more explicit way, it is money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transactions.
There are different perspectives from which people view debt. On the one hand, some people view it as a bad thing that can ruin your chances of ever getting rich, or a bad thing that can crumble your money if you already have some. On the other hand, others view it as an easier way to get out of poverty and to build enormous wealth.
Before you continue reading this writeup, find out within yourself how you view debt. Ask yourself if you think debt is a good thing or a bad thing.
Whatever way you view debt can be correct. This is because debt can either make you extremely poor or super rich. I will tell you a short real-life story which will explain this and provide a brief answer to question 3 and question 4.
3. Which debt can make you extremely poor?
3. Which debt can make you extremely poor?
When I was growing up as a child, my mother was doing "petit trading" and her turnover was rapid. Even though her income was small, it could get our basic needs.
After sometime, my mother met her old friend-- a friend since their days of primary school. The friend was a successful business man who had built a great fortune. He had a beautiful house, a nice car and many other things which make life pleasurable. My mother envied him and she wanted to elevate her own status. Consequently, she borrowed money to do maintenance of our family house so that it could look attractive. She also bought good dresses for herself and for us (her children), and many other liabilities.
Out of the sudden, my mother's business collapsed and she couldn't repay her debts. Her creditors kept piling interest on the principal loan. This was how she failed and thereafter, everyone in my family grew up with the impression that debt is a very bad thing. As a matter of fact, my mother's failure became a case study and everyone in the family was warned never to get into debt.
Debt is really bad, right? It can ruin your entire life and the perception of your entire generations in a very short period of time, right?
If your answers to the above questions are all 'yes,' then you are right too. However, I want to tell you today that debt is bad only if you get into it to buy liabilities. Liabilities remove money from your pocket. There are exactly the things that my mother spent the money that she borrowed on: house maintenence, dresses etc. If you borrow money to spend on these liabilities then you will remain poor forever and your next generations will have a vary bad impression about debt until, by some grace, they discover, or someone teaches them, financial education.
3. Which debt can make you super rich?Debt is really bad, right? It can ruin your entire life and the perception of your entire generations in a very short period of time, right?
If your answers to the above questions are all 'yes,' then you are right too. However, I want to tell you today that debt is bad only if you get into it to buy liabilities. Liabilities remove money from your pocket. There are exactly the things that my mother spent the money that she borrowed on: house maintenence, dresses etc. If you borrow money to spend on these liabilities then you will remain poor forever and your next generations will have a vary bad impression about debt until, by some grace, they discover, or someone teaches them, financial education.
It is very easy to use debt to become super rich.
My mother's old friend who had become super rich did not get his fortune through manners from heaven. He told us about his story. It could be summarized in two words: "financial intelligence." He learned about money and he was able to use debt to amass enormous wealth. I will not recount his story here because my book titled Money Mind recounts similar stories. Preorder for the book through (+237) 678639128 so that you will get your copy and learn about the stories once the book is published. It is a guide to financial freedom.
The first thing that you need to do in this area is to become financially intelligent. As a financially intelligent person, you will know that when you borrow money, you are supposed to use it to make more money. This is done by buying assets (things that will put money in your pocket), not liabilities.
Take this example: If you borrow 450,000FCFA with interest rate of 3%/month, it follows that you will pay 13,500FCFA each month. (We have divided 3 by 100 and multiplied the result by 450,000FCFA).
As a financially intelligent person who has mastered the power of using debt to make more money, you can use the 450,000FCFA to buy an asset like a bike and mortgage it (give it out on the basis of balance-and-take) for 750.000FCFA within the period of 8months. In this regards, the customer who takes the bike will be paying you at least 20.000FCFA per week which you will be using excess cash to pay back your loan/debt. This means that in a month, he will pay you at least 80,000FCFA out of which you will use 13,500FCFA to pay interest for your debt and then use excess cash to reduce the loan. Note that as you reduce the principal/loan, the interest reduces too.
I know that there is risk involved but that is exactly what makes some people rich and others poor. The rich take the risk while the poor fear and remain poor forever. If you want to get rich, then start using debt to make more money once you conceive a profitable idea.
Learn more in Money Mind. Learn how to use other people's money, time and skills to enrich yourself.
4. How do I pay off my debts?
It is no longer time to be asking if your debt is making you more money or not. We have already discussed that and I guess it is clear enough for you to understand. Let us now look at how you can pay off your debts if you owe many financial lending institutions.
In this section, I want to note that paying off your debts is not done without serious thought. This is because random repayment of debts makes you stupid in the financial world. I am sorry for saying that but it is exactly the truth. You need to know a particular pattern of paying off your debts. I will discuss two main patterns here which can work for you and save you the disgrace of being stupid in the financial world. I call the two patterns or methods The Snowball Method and The High Rate Method.
Remember that when you borrow money, there is a minimum amount that you have to repay within a specific period of time, be it one week, one month or one year. For example , you may borrow 100,000FCFA from the bank and the bank tells you that you have to repay 10.000FCFA every week. That 10,000FCFA goes to reduce your principal.
Now, how do the two patterns/methods of debt repayment operate?
With the Snowball Method, you pay the minimum of all the debts which you owe various financial lending institutions and send excess money which you have made within that period to the lowest debt. This will clear off your lowest debt within the shortest possible time. For example , if you owe, say banks A, B, and C 100,000frs, 200,000frs and 300.000frs respectively, and your minimum payment in each of the banks is 10.000frs per month, it follows that you will pay 30,000frs in the three banks every month. If you work hard so that after paying the 30.000frs you still have excess cash of 20,000frs, you can use it to reduce your lowest debt which is 100,000frs. In this way, you will easily clear off the 100,000frs and thus, owe only two banks. Once that one is cleared, use the same approach to clear the 200,000frs which appears to be the next lowest. This is what we call the Snowball Method.
With the High Rate Method, you pay all the minimum and use the balance or excess cash to reduce the loan with highest interest rate. For example, if the interest rates for the three loans above are 5%, 6%, and 4% respectively, then by this method , you need to use excess cash to reduce the loan in bank B which has the highest interest rate of 6%. After clearing this one, the next one with higher rate is the loan from bank A. Its interest rate is 5% which is higher than 4% for bank C.
Whichever method you choose, be smart in it. You will get out of debt faster than you ever imagined . Don't repay debts randomly without serious thought and calculation.
I will end here today. I wish you the best in your quest for financial freedom.
Get to me/ read my stuffs through the following:
Tell: (+237) 678639128
Email: mackeusnguni@gmail.com
Facebook: MONEY MIND
Website: https://moneymind.websites.co.in/update/welcome-to-money-mind/310894
Blog: https://mackusnguni.blogspot.com/2020/03/about-mackeus-nguni-mack-ken.html?m=1
