Reduce the cost of debt

If you have borrowed money – and everybody has at some stage – then you have incurred expenses for the privilege. Debt costs you in interest, together with other creative charges that are levied by lenders.

It is important to distinguish in your own mind between money borrowed for investment (such as for a house or business) and money borrowed for consumption.

The worst type of debt to incur is for consumption. Why?

• First, because there is almost no lasting benefit.
• Second, because this type of debt is usually financed with high-interest credit cards or personal loans.

If you owe money and want to reduce your debt expenses, you can:

• Shop around for a lower-rate credit card or new loan, bearing in mind that there may be charges, particularly on personal loans, for early exit fees on the existing loan, and set-up fees for the new loan.
• Make it a priority to not increase the level of this type of debt and, ideally, to reduce it to zero.

All spending is a choice.

You have to spend money on shelter, food and clothing. These are basic needs. But how well you live and how well you eat and dress are personal choices. Beyond your basic needs, all expenditure is discretionary, apart from the cost of servicing debts, which are the result of choices you made in the past.

Get a calculator and your credit card and loan statements and work out how much consumption debt has been costing you in fees and interest. If the result is a shock, and you want to reduce this expense, then here are your next steps:

1. Stop using the credit cards. Stop increasing this type of debt. And certainly do not use the card for cash advances.
2. Set a goal date for getting these debts to zero. Work out how much you will need to pay each month to accomplish that objective. Start paying them off.
3. If you have more than one credit card, make it a goal to reduce the number of cards to only one. As you get a credit card back to a zero balance, close the account and destroy the card.
4. Carefully weigh the cost of each spending choice that you make from now on. Pay for these purchases with cash. Somehow, using plastic doesn’t seem like outlaying real money – at least until the statement arrives – whereas handing over cash is sobering.

If you think about the choices you made in the past, you will surely realize that your spending has always risen to meet increases that you have had in income. We are all skillful at justifying indulgences. We all tend to spend right up to, and sometimes beyond, our level of income.

If we think about it, almost none of those purchases gave us a lasting sense that our lifestyle had been greatly improved. The thrill of acquisition was fleeting.

I am not advocating denying yourself all pleasures, but those debt expenses are money down the drain. If you want to reduce them, then you will have to make short-term sacrifices. The decision should be helped by the knowledge that what was frittered away in the past never gave you more than passing satisfaction.

As well as leaving more money in your pocket, it is a good feeling to be not wasting money on debt expenses, beyond what is truly unavoidable.

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