Shortly after I graduated from college, I worked in the
office of an oilfield equipment manufacturing company. One of the guys from the plant
liked to give me
unsolicited financial advice. "I never worry about how much something
costs in total," he counseled. "The question to ask is, 'How much a
month, for how long?' That's all the information you need to know when you're
deciding whether you can afford a purchase. Think of it as just another bill."
I'd nod politely, but even though I was young and naïve, I
found it hard to digest that philosophy. Why wouldn't knowing the total cost of an
item matter?
If you don't care about ever getting out of debt, make only
the minimum payment each month. You'll pay for your purchases many times over.
Think about what you could do with all that extra money...
For most people, debt is inevitable, and many would argue
that there is such a thing as "good debt": a mortgage on a family
home, a student loan to finance a college education, perhaps even a car loan or
credit card debt for suitable clothes so you can nail that job interview and eventually
earn a living.
But too much debt is suffocating, and it can prevent you
from building wealth. Interest and fees can accumulate to the point where your
costs to finance a purchase exceed the value of that item.
Before you take on debt, know why you are doing it. How much
are you borrowing, and how long will it take to repay? How much are you paying
in interest?
Can the purchase be postponed for a while, until you can
come up with the cash, or at least a larger down payment? What are the
advantages of buying now, or financing instead of paying in full? Will there be
a return on your investment, i.e., the extra cost to your purchase price that you
will add in interest?
Look at debt as a means to an end, and let there be an end
in sight. Don't regard debt as a perpetual bill.
What are your thoughts on debt? I would love to hear your
comments.
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