Wednesday, March 12, 2014

3 Reasons Why You Should Experience Debt When You're Young

By debt, I mean consumer debt and not leveraged debt.

In other words, this debt refers to the money you owe to credit card companies (banks), friends, relatives and money lenders because you bought the latest goods, luxuries, fancy vacations and other unnecessary consumer goods.

Contrary to the advice of most financial gurus, I believe that you should experience consumer debt in its fullness (at least once) when you're young. The reasons are listed below:

1) You will fully understand the psychology of debt & the effects of compounding interest rates

You never really understand the psychological effects of debt until you're deep into it. The banks know very well that if people were given 2 choices, to pay off debt in its entirety or to pay the bare minimum every month, people will always choose the latter. 

This classic human condition is attributed to our need for instant gratification. If you were given 2 options:

Option 1: Accept $100 today. 
Option 2: If you wait till tomorrow, you will be given $103

Which option would you take? Most of us would choose Option 1 without blinking an eye because of our need for instant gratification. An additional $3 tomorrow does not seem as appealing as having $100 in hand right now.

Because of this, we always choose the easy way out and choose the psychologically easier option of paying the bare minimum on our credit card bills. Coupled with the effects of compounded interests, you will never be able to pay off your debt.

In the casino, the house always wins. Likewise, the banks always win because they have a psychological advantage over you.

I'm trying to say that by experiencing debt, you will finally learn that you should always pay off your debt in its entirety.

After all, it's better you learn this cold hard fact in your 20s than in your 30s, before life gets more complicated.

2) Discipline & Determination

Debt is not that much different from quick sand; the more you struggle, the deeper you sink in.

If you make an effort to get out of debt, you will learn the hard way that being disciplined is the only way that you are going to make it out of that quick sand. At the same time, you will also understand that determination and grit is discipline's best buddy.

3) When you hit rock bottom, the only way left to go is up

I did not realise the severity of my situation until I was at rock bottom. With only $100 in the bank, a couple of thousands in debt and 1 more week before the paycheck arrives, I knew then that I was at rock bottom. 

People say reality's a bitch, I can testify to that.

I really hope that no one has to hit rock bottom, but if you're the stubborn kind, I hope you hit rock bottom quickly because it will mean that you have a better chance of rising to the surface again.

I don't mean this with ill intent, but if you were to hit rock bottom in your late 40s/50s, you may have been diving down an ocean so deep, and by the time you hit the base, you may realise that you do not have the breath to make your way up again.


Now, of course if you already understand the points above thoroughly, then there's no reason for you to experience debt - you have an advantage over many.

"Debt won't make you happy, but everyone wants to find out for themselves" - adapted from Zig Ziglar

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