Debt Help for Those With the Wrong Mindset
If you’re looking for debt help then there’s probably two reasons for being here:
1. Your circumstances have changed and you now find yourself unexpectedly in debt and unable to pay your bills (e.g. you’ve lost your job).
2. You have the wrong mindset and it’s the decisions that emanate from that mindset that have got you to where you are now.
There’s not much that can be done to prevent the unexpected other than some basic risk management.
Financial Risk Management to Avoid Debt
Risk management is essentially about identifying the risks that could land you in financial trouble and then mitigating those risks. For example, there’s the risk of being made redundant at work. How likely is this to happen? Also, if it were to happen what would the impact be (low, medium or high).
If the risks are high and the impact is high, then you would consider what options are open to you for mitigation. For example you could invest in income protection insurance that might cover you for a proportion of your salary for a pre-determined time. This might be enough to ensure your debt doesn’t become unmanageable.
Beware instant gratification!
The other issue I see for people seeking debt help, and the main reason for this article, is that many people have the wrong mindset. This leads to poor financial management practices that can have a detrimental effect later on. Let me explain…
I have no evidence to support this theory, it’s just one I have developed by listening to people seeking debt help.
I think some people grow up in households where they child is given pretty much whatever they want. Affluent parents might agree to buy the higher cost brand names rather than shopping at Target or Kmart. The child learns to expect more.
Additionally, the child learns to expect that they’ll get most of what they ask for; after all “they deserve it” don’t they?
Advertisers play on this expectation. How many ads have you seen that tell the prospective client to buy the product because they deserve it.
Alongside this is the credit mindset. I can’t wait to save the money for the product or service so I’ll just use my credit card or apply for a personal loan. Instant gratification!
Leverage and how it can work for you
There’s a financial concept (or mindset) amongst investors called leverage. This is how it works…
An investor who believes that an asset will appreciate in value borrows money to buy more of the asset than he or she would have been able to acquire with their savings.
If they are correct and the asset does appreciate in value; e.g. shares prices go up or property process improve, then they have leveraged their investment and they make more money.
People who seek debt help from us often do the opposite. They borrow money to buy assets that depreciate in value. Here’s an example.
Say I borrow $10,000 to buy a car with the term of the loan being 5 years at 8%. I will have to pay back around $14,000 for the car over the five years and it will probably be worth much less, say $5000 when I do. So for an investment of $14,000 I am left with an asset worth $5,000 after 5 years. That’s not a great investment!
When you combine all these factors together, there can be a multiplying effect. In the end that can lead to serious amounts of debt that just can’t be paid back.
Some thoughts for your situation
Check your own mindset. If I suggested to you that you pay cash for the car (or other asset) and just buy whatever you can afford, how would you react?
If I said go without television while you save the money for a new one, what would you think?
Instant gratification and the “I deserve it” mentality is a dangerous mix.
To avoid getting yourself into too much debt, consider doing some basic risk management and putting in place mitigations should the risk eventuate.
Check your mindset. Are you prepared to wait to buy assets that depreciate in value? If not, beware of overloading the credit cards and personal loan portfolio.
Finally, seek debt help early; don’t let your problems grow beyond your control.