You are paying a premium in the form of interest for wanting something now that you don’t want to wait for until you have saved the money to buy it cash. Paying interest is the main reason why debt makes you poorer.
Without doing the effective calculation to take instalments into account, let us look at a simple example to illustrate the impact of interest: If you buy a TV for R10,000 and take out a loan repayable over two years at an interest rate of 10% per annum. R10,000 x 10% = R1,000 interest is payable per year for two years; thus R2,000 over two years. You have thus paid the capital amount of R10,000 plus R2,000 of interest which adds up to R12,000. You have received a TV to the value of R10,000, but you have paid R12,000 for it. Apart from that a TV is depreciating in value. After two years it is probably worth only R6,000, but you have paid R12,000 for it making your loss even worse.
Some more reasons why debt is making you poorer:
- The principle of compound interest has a negative impact as you are paying interest on interest. This is why you often experience that you are paying your monthly instalments, but the outstanding balance reduce at a very slow pace.
- Debt is extremely expensive in South Africa. Credit cards, personal loans, clothing accounts and overdrafts are the most expensive forms of debt but also the most commonly used.
- When you are missing payments or pay late, penalties and more interest will be charged in most cases.
- Debt is easily available in South Africa and one of the biggest reasons why South Africans have developed a culture of living above their means. When you start using debt to pay for living expenses it can quickly create a negative spiral that you cannot easily escape from.
- Debt is robbing you from the opportunity to save and invest and increasing your net worth. Instead of expanding your asset base you now have liabilities which have a negative impact on your net worth.
You cannot argue the fact that debt is making you poorer irrespective of the fact that it allows you to have things that you cannot afford otherwise. Remember if you are owing money for those things, it is not considered yours until you have repaid your loans. Those things might help you to create the perception that you are richer; but the reality is you are poorer. Avoid debt. Cash is king!
Written by Ronel Jooste
Contact Ronel: email@example.com
CA(SA), Financial Consultant and Coach, Blogger and Speaker
For more information about my financial wellness programmes visit the website