It should be debt awareness week every week of the year! Minimising and avoiding debt even on a low income will go a long way towards controlling your finances and increasing your wealth in future. Here’s how I’ve used my privilege to stay out of credit card or loan debt over the years, even while unemployed or as a student.Listen to “055: Why I've Never Had Debt” on Spreaker.
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Transcript of Why I’ve Never Had Debt
Bear: [00:00:00] I was on a course and I met a guy who turned out to be a Greek shipping billionaire, as you do.
And he was single-handedly trying to bail out greece. Greece was in a massive recession. And so he was trying to convince all kinds of wealthy people to buy Greek bonds and then just write them off.
So basically investing in Greece and instead of expecting a return, just kind of giving the money back to Greece to help them with that debt problem.
Now, unfortunately, most of us do not have a billionaire to sweet talk other investors on our behalf if we’re in trouble.
I’m privileged to have never been in debt. And I’d really love for that to be a future where most of us never have to be in debt,
but I think there’s some things that we need to know first in order to avoid that.
First of all, what do I mean by debt? So I wouldn’t count my mortgage in that. A mortgage is one of the most socially acceptable forms of debt.
And I belong to the school of thought
that for a lot of us, it would be a good idea to repay our mortgage as early as possible. But what most of us end up doing is remortgaging and remortgaging, and remortgaging so that we’re paying our mortgage until we die.
I’ve also had student loans.
But more on that in a bit [00:01:00] about why I just don’t even think of those as a debt,
but I’ve never had any loan debt, credit card debt.
So here’s the list of reasons.
First up, I don’t and have never used buy now pay later, even when it’s not presented.
Personally, it doesn’t give me peace of mind to spread out the payments for something. If I’ve already got the money for it, I prefer to just pay up front. I know what I’ve got left over to allocate my resources going forward.
Obviously, if you don’t have the money up front for something, you’re going to use an installment plan, but something has to be so, so, so essential
for me to buy it in the first.
And so I’ve just never been in situations where I’ve had to choose between paying for something upfront and paying for it monthly, whether interest is charged or not.
If my TV broke for instance, and I didn’t have money to buy a TV outright, I would just go without.
There are some suggestions that buy now pay later is going to be a way to buy food in future.
If we get to that stage where lots of people are using buy now pay later to buy food rather than being served by a food bank,
not that food banks are an endless well of money,
so by all means [00:02:00] donate to those and deliver food to those if you can,
then something very big will have to change for the entire nation.
Similarly, I’ve never used credit cards as money that I don’t have. I’ve only ever used them as a credit score builder. I’m pretty sure I’ve talked about this before. So let’s see what I had to say.
Do use a credit card responsibly.
You need to keep the debt to affordability ratio really low on that card by only spending a tiny percentage of the credit limit available. I only spend money that I have anyway. And then I set up a direct debit automatically to pay the bill off in full, before incurring any interest. And that just demonstrates to lenders that you can manage credit and that will usually improve your credit score, which you can then leverage for something like a mortgage.
So done correctly, buying your groceries can actually go towards buying a house one day.
I’m not a financial advisor. That’s just my experience. I’ve never had loans besides student loans.
And one of the reasons that I don’t think student loans are the scaremongering debt that the media and some politicians make them out to be is because I agree with Martin Lewis, that they’re misrepresented. So he says don’t confuse the cost and the price.
What matters [00:03:00] in practical terms is how much you have to repay. And that’s a completely separate number from the total amount of tuition fees, maintenance, loan, and interest. what you repay solely depends on what you earn after university.
Or what money saving expert calls a no-win no-fee education,
so everyone should know that there is a minimum threshold at which you start to repay student loans. So, if you struggled with any unemployment,
when you graduate or you were being paid below a certain amount of money, you wouldn’t be repaying the loans anyway. After 30 years, any and all remaining debt is wiped.
Many of the people earning over the threshold still don’t repay the debt within the 30 years. So it gets wiped.
There are no debt collectors unlike with other loans.
One change since 2012 with student loans is that above inflation interest can be charged.
But again, with that Martin Lewis and his team say that in practical terms for a lot of graduates, especially those who never become high earners, they’ll never end up repaying any interest. So it’s meaningless.
Martin actually thinks that the student loans should be bigger because the loan you receive
doesn’t always [00:04:00] leave very much left over after paying for student accommodation. This is where it’s really important to learn early on how to assess your finances in advance and what you can allocate.
and unlike other loans, student loans also don’t go on your credit file.
Bear: Perhaps it helped that I worked before becoming a university student. So I’d already had to practice at managing an income.
I’ve also just always lived within my means. So for instance, you’ll see budget strategies thrown around that are like the 20/30/50 rule,
which suggest spending 50% of your income on essentials, 30% on things that you want and 20% into your savings. I came to the conclusion quite early in life, I guess, cause I wanted to do expensive things like travel that I wanted to be saving a higher percentage than that each month. And so my savings percentage was usually more like 50%.
Obviously that wipes out the 30% spent on wants. But if my want was that I wanted to save up a big pot of money to do something, then that to me would override all the many little [00:05:00] things that I might want in the meantime, but that didn’t really have the same lasting value for me. I’ve also always had an emergency fund.
So when deciding whether I can afford to do something that I want to do, or even what price range to aim for when buying something that I want,
I always try to protect a cushion of money that was emergency savings. So that’s your very last resort if you lost your job
and had chewed through any other savings. So I wouldn’t have gone abroad for instance, if it meant spending the emergency fund; the emergency fund was the thing that I had as a buffer if something happened to me while I was abroad or it was money that was there
when I got back, if I got back and discovered that actually I was going to be fired instead of on sabbatical.
And apart from a period of life when I was living off my emergency fund and temping
I’ve nearly always had multiple streams of income.
So the sooner you can set those up in life, the more avenues that gives you and the more runway
to make decisions if you need to exit certain situations.
If you are in debt or think you might be in risk or going into debt,
speak to a debt charity, speak to citizens advice, [00:06:00] talk to someone you trust. Don’t suffer inside.
I really, really hope that any debt is temporary for you. If you’re suffering from decision fatigue on what to watch and listen to, and where to save money.
Just check out what’s next on Save Like A Bear It’s all done for you.
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If you’re a chameleon like me, then there’s a range of designs to choose from to suit your personality (and your printer ink levels – let’s be practical now). Choose your own spending categories to write in the blank label space and match whichever design you prefer to your priorities.
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