We no longer live in capitalism. We live in debtism. In order to achieve our goals we oftentimes need to borrow money (except with those of us who have rich parents). If you want to go to university, buy a house, or purchase a new TV you may need to borrow money.
Banks make it easy. Credit card companies want to give us more room to borrow. The hard part is paying it all back. It is not pleasant, and makes it even more difficult if things we decided to purchase were consumed long time ago.
Productivity of Debt
Some debt is more productive than other debt. For example, you may want to borrow $10,000 for education, and then use that education to repay the debt back. However, it depends on a a program. For the same one year degree in business vs. french poetry, the payback on the former is likely to be much faster.
Yes all of us want to follow our dreams, but the productivity of debt must be considered. We don’t need to suffer because of our dreams. Dreams that require debt that cannot be easily repaid are not, in my opinion, worth the pursuit, at least not through the pathway of getting into debt. Find a cheaper way to study French poetry.
If you want to pursue a dream that has no future productive capacity or payback, perhaps it is better for find a way to pursue that dream without any debt or abandon that dream altogether
Unproductive debt is debt that does not produce future benefits includes unnecessary consumption (i.e. latest TV, second car etc). The debt that is unproductive should be avoided at all costs.
Getting into debt
Prior to getting into debt one should consider whether it is worth it:
- Will the debt increase my future productivity
- How quickly can it be repaid
- Will it limit my other dreams and freedoms
Debt repayment strategies:
Let’s say you decided to go into debt and now it is time to start repaying it. There are several debt repayment strategies that experts recommend:
- Debt Avalanche Method
- Make minimum payment on all debt
- Make an extra payment on the debt with the highest interest rates.
Let’s say Jane has a a student loan of $5,000, monthly payment of $500, and an interest rate of 6%, and a credit card balance of $10,000 with a monthly payment of $500, and an interest rate of 20%.
To avoid debt accumulation the debt with the highest rate should be repaid first. For example, according to debt avalanche method Jane would make minimum payments on both a student loan and a credit card – $500/each, but would make an additional principal payment towards her credit card until the credit card is paid back. This will reduce the total amount of interest Jane needs to pay to a credit card company helping her get out of debt easier.
2. Debt Snowball Method
Debt snowball repayment method recommends that the debt with the lowest principal amount is repaid first. Proponents of this method argue that it is psychologically easier for an individual to repay the debt with the lowest principal amount. It allows and individual to experience success sooner, and provides further reward for debt repayment.
Using the same example, Jane would make minimum payments on both her student loan as well as her credit card balance. However, any extra contributions towards debt repayment will go towards her student loan since it has a lower balance. This will allow Jane to get the repayment reward faster, and continue the pursuit of her debt repayment strategies.
One should choose the best debt repayment method based on his or her personal circumstances. However, it is just as important not to accumulate unproductive or consumption debt. That way individuals may never even need to think about repaying a debt that they never needed in the first place.