5 things school SHOULD have taught us about managing debt

By Aaron Weafer

I am blessed (or cursed as the case may be) with a pretty detailed memory. I recall with clarity many things about school as a little kid all the way through to the Masters degree I’m currently embarking on. Of all of the things I learned, I know I didn’t ever have a class that taught me anything practical about how to be a “grown-up”, especially what to do with debt!

Oh, I do recall how easy it is to acquire debt. OSAP is practically assumed, not to mention credit card companies handing out credit/debt like a crack dealer giving you a taste for free, all the while knowing you’ll be in his pocket in no time.

If you did have someone teach you a little about credit, debt and what to do with it then you should call them and thank them. Today. Because if you’re like me you didn’t learn this stuff in school.

1. It’s all about the Interest

Think back to your first loan. OSAP, Visa, car loan, line of credit… do you recall having an understanding about the implications of the interest rate they quoted? No one likes to live with debt, but the understanding of the cost of that debt is rarely explained. The cost of borrowing money in the first place is ultimately what buries so many of us. Because the rate is what determines our monthly payments we all need to pay attention to what the rates are on each area of our total debt – perhaps even more than how much we owe as a whole.

2. C.R.E.A.M. (Cash Rules Everything Around Me)

Let’s face it, every month there is only so much money coming through the door. No matter how well you manage your budget, you’re dealing with a finite resource. Having enough money in the budget to take care of important areas beyond paying the bills is a difficult thing to do. Most of us can quote an approximate number relating to how much debt we carry while some of us are able to be more precise, but almost all of us are aware of our debt load to one degree or another. What I challenge you to examine is this; how much of your monthly income is swallowed by debt payments? At what interest rates are those payments? Can anything be done to make your money more effective? Where your cash flow is directed is a key to managing debt and complete financial health.

3. There is Hope – You can develop a plan to manage your debt

For a majority of people we carry debt in 5 areas: mortgage, car loan, line of credit, credit card, student debt. Going back to the first point, the interest rates on each of these areas is wildly different. Because of high interest rates our cash flow becomes consumed with paying across the various areas of debt, and there isn’t enough available to do what we would like to do. This is where debt consolidation comes into place. When it comes to managing your money something even more important than the actual amount of your debt, is the allocation of your debt load. Moving debt into one large pool, with manageable rates and monthly payments can be a major key in unlocking your financial future. This solution is not a complete one size fits all type of deal, but this is an area where I personally have seen the biggest impact in the lives of my own clients. If you’re carrying debt across three or more areas you should contact a financial advisor look into solutions.

4. Debt Free might not be the answer

People typically fall into one of two camps on this subject. Debt is something you have to deal with, or, they join the “Debt Free Revolution”. However, very often those with the highest net worth often carry large debt loads, strategically placed in order to generate the best possible use of interest rates, cash flow and returns. As a rule most people need to get a hold of their debt and get out from under the weight of it; however, once that is accomplished, a well placed, calculated amount of debt, at a good interest rate can actually be used as a tool to build wealth rather than an anchor to sink us.

5. How to make money work for you – even money you borrow

Think of the real estate developer who builds the new office building or condo project. Are these projects funded with cash they have in hand? Or the investment banker who manages and builds multi-million dollar portfolios. Think of how the government budgets and the banking system works! It’s all based on strategic allocation of money borrowed (aka debt). There are ways these principles can be applied to the individual so that, when done properly, they can mitigate risk and actually make money for you. There are risks involved of course, but I don’t recall a class in high school or my undergrad that taught me any of this.

Now, this is by no means a final word on this subject, but it is really designed to make us take a look at our debt. What are we doing with it? Are there other options for me? What can I do? What should I do? How can I learn more about this? As always, the best advice for you, is to go seek out some specific advice for you! You can always send me an email to ask any specific questions or share your thoughts.
AARON WEAFER has been interested in the world of finance since the days of Alex P. Keaton on Family Ties.So it makes sense that he grew up to work as a Consultant with one of the most respected financial planning companies in Canada. You’ll most often find him in one of Hamilton’s great local coffee shops engaged in conversation about one of his many passions or with his nose buried in a book. Have a question? Need some free advice?
Email him at: aaron.weafer@investorsgroup.com

Share post

Tags

• debt
• education
• money
• savings
• tips