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What is the real cost of debt?

Debt

What is the real cost of debt?

Reading Time: 2 minutes

While at university

Today I want to tell you a hypothetical story about the true cost of debt. You went to school for 12 years, only to go to university for another 4 years. Your whole life you have never had your own money. Even at university all of your money came from your parents. You didn’t have any reason to save, you got the bare minimum and you did well reaching the end of the month without that dreaded, “Please mom I need more money”, phone call. You never phoned your dad because you needed that sympathy factor.

Your car was a 10-year-old hatchback that had a lot of kilometres on it from when a family member was still driving it. When the mechanic phoned you to report on everything that needed fixing, your first question was always, “what can possibly last until the next service?”

You start working

Then finally you started earning your first salary. You and your friends have been discussing how you are going to blow your first paycheck for months now. It was always something like the latest Sony Play Station and a brand-new car.

You are walking into a decent junior level position and everyone needs to know that you mean business. You are going to work with clients and driving a nice car makes business sense. So, without even earning your first paycheck, you took your new employment contract to the bank and they gave you a loan for that brand-new Mercedes-Benz. You didn’t think about it twice, obviously, the bank did their math and determined that you will be able to afford the car. Why would you doubt them, it is their job to know how much you can repay?

You have lived in a commune for the last few years and all you want to do is have a place of your own. You start renting a small apartment. The apartment needs to be furnished, and Coricraft is willing to give you a loan. You don’t mind the expense since you won’t need to buy other furniture in the foreseeable future. It makes sense to take the repayment option over the longest possible period since it makes the repayments incredibly small.

You need a new phone and decide that the payment difference between a Samsung A3, you set out to buy and the latest Samsung S9 is only R400. It is all about the extra processing power. Another great option you have is to increase the payments with only R250 per month and get the latest Gear S3 smart watch included in the deal. A year later you are still repaying everything you bought in the first 3 months after you started working. You are still making your debt repayments rather comfortably.

You decide to buy property

A friend of yours bought a property. The option of paying off your own home loan, instead of someone else’s, is appealing. You decide that you also want to buy a property. You are in a serious relationship and you want to have a place that will still be large enough for you and your significant other to build a life together. It should have at least 3 bedrooms, a garden and a double garage…

This is an excerpt from the Tigers on a Golden Leash blog. See the full article here. Reposted with permission.



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Comments

We see people every day doing stupid things with their money. We do stupid things with our money. Be it in ignorance or habit. I want to become stupid rich. I want to be free from it all and I want to do something worthwhile. I write about achieving my financial goals, sharing what I have learned and being content with where I am in life. I’m doing the research anyway, so I might as well post it on a blog for you to benefit.

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