Daniel Ngari .com - Inspiring Friends » finance

Of Good and Bad Debt

Daniel Ngari — Thu, 06 Aug 2009 11:26:21 +0000

Have a quick look at those two men over there; Steve and James. They have the same education; same job type, and are of the same age – but have different outcomes in life. Steve had a knack for accumulating credit card debt; James focused on wise investment loans. Today they live in different worlds; albeit next to each other.

To get ahead in life, you have to really understand the difference between good and bad debt. Good debt takes you ahead in the long term while bad debt pulls you back.

The Allure of Bad Debts

As your income increases, credit card companies, car loan companies and other sharks will be baying for your blood. They will give you the most compelling offers. You see those offers all the time, if you cross a certain income bracket. For only a small monthly repayment, you can get to live in your dream house, have your dream accessories and drive your dream car.

Graphic designers do booming business for the bad debt peddlers. They will come up with interesting ways of showcasing the kind of life you can live, the glory, the luxury, the majesty. They will play with emotions that you did not even realize you had.

The fancy pitches of bad debt salesmen can blind you. They can get you to stop thinking about the future. Why wait when you can have it now? Why not get that new fridge on credit? Why not pimp up your brand new ride for a low monthly payment?

Enter Steve …

Steve got caught up in what I like to call the credit mess. He got a phone call from his bank telling him that he had been pre-approved for a car loan. He had not even thought of buying a car! Then they told him he had 2 months to think about it before the “pre-approval” expired. Instead of taking time to go think about whether it was right or wrong for him to get a car on loan, he started hitting the pavement to the dealerships.

He took a friend with him and shopped with the confidence of a man who has the cash in his pocket. His demeanor changed, he walked with a spring. He was on cloud nine. The car sales men made him feel like a king. They were there to serve him. They showed him around the dealership. Was he looking for a used car or a new car? He did not care. He had the pre-approval to buy anything his heart desired.

Even before the 2 months period elapsed, he had signed the dotted line. He had a brand new BMW, metallic paint, alloy wheels, tinted windows, leather seats and a million other add-ons that that the car salesman had suggested. The extras alone had cost a small fortune, but it was a “negligible” addition to the monthly payments over 5 years.

As he drove off the dealership, he realized that he felt different. Same guy, different car – and people were already treating him different. He loved the attention of the ladies. Oh the power of debt. He felt like a rich royal. All he had to do was make the monthly payments and life would always be this good. He wound down his windows and saw all those flashy cars on the streets…he wondered…how many others are driving financed cars just like him?

The good life …

He got invited to more parties. More people wanted to hang out with him. He now felt like he had to upgrade his wardrobe. It was long overdue, he justified himself. What does he do at this point? He whips out his Visa credit card.

After being invited to a few parties, he felt like he had to return the favor. He wanted to hold a birthday bash at his own house. Then it hit him that he lived in a very humble house compared to his friends. It was time to make a move. He moved to bigger house, it needed furnishing, nice furniture for a man with “class” like him. So he whipped out his MasterCard credit card.

The deeper he got into debt, the more he enjoyed life. The more he enjoyed life, the more friends he made. All his new friends were in similar situations. They were all on a high. Debt is like a drug. It is addictive yet alluring, but with deadly consequences.

What Steve did not realize was that one bad debt begets another. One spendthrift friend begets another. The banks love people like Steve. They are their bread and butter. They provide them with the insane profits; profits that make bank shareholders happy. What Steve pays as interest, they call it “income”.

Good Debts to Get Ahead

On the other hand, James preferred to live within his means. He got tempted all the time to take up credit card and car loan debts at very friendly terms, but he would hear none of it.

To a person looking at Steve and James from a distance, Steve would have seemed to have made it. He had all the flashy possessions to prove he was “rich”. But if truth be told, James was content to live within his means. He was proud of his budgeting skills. He was proud that he was playing the financial system in his favor, not the other way round.

James took the bus to work. Sometimes he would take his beat up Toyota to work. It was just a car that took him from A to B, but it was his. Not owned by a bank or a finance company. He made no monthly repayments for it and did not have to change his living conditions to accommodate the image brought by the car.

He had good friends that had known him for years. Their social lives involved interactions based on a lot more than material possessions.

James did have debts also, but his debts were geared towards investments. He borrowed from the banks to buy and build property. He was disciplined in making his repayments and maintaining a good credit history with his lenders. He never borrowed more than he could comfortably service.

He would do his homework well before he signed the dotted line. He understood the time value of money. Sometimes he let some opportunities pass him by if he did not think that he understood fully what the investment would mean for his future cash flow.

In Summary

To get ahead in life, you need to seriously evaluate what kind of debts you get into. Are you buying an asset or a liability? Are you going to be able to service that debt without adversely affecting other areas of your life? Do you have to take that particular debt?

You can leverage debt to get ahead in life, but be careful about car loans, credit card loans and other consumer loans. If you have to take on debt, lean on the side of investment loans and even then, make sure you do your home work well.

Please share this article (and blog) with your friends. I would love to hear your comments. Please share your experience, thoughts and ideas regarding good and bad debts in life.

Financial Freedom Manifesto

Daniel Ngari — Tue, 20 Jan 2009 11:13:18 +0000

Let me begin by saying that this money-festo is not for everyone. If you find the raw glorification of money offensive, please feel free to skip the rest of this post. I will have something different for you tomorrow, but I had to share this with a dear friend.

Some people say money cannot buy happiness. I believe that people who say that, and are in good health don’t know where to shop. From where I am sitting right now, I could do with more money. I happen to know a lot of my friends who would do with more money and are not ashamed to admit it. I dedicate this post to one such friend.

If you hate the thought of struggling financially in life, and are willing to do something about it, I dedicate this post to you too. The lack of money is the root of all problems (I could be wrong). Maybe next time I will be preaching a different gospel, but let me get this out of my heart.

Lack of money steals something of value from human beings. And that thing is called freedom. I want to inspire you to regain your freedom. Freedom to be who you are and become who you want to become. Freedom to be where you want to be, hang out with whoever you want or be whatever you crave to be.

What is Freedom?

Freedom is having control of your life, your time, your activities and your dreams. Freedom is having nobody stopping you from achieving your purpose and mission in life. It is owning your destiny. It is running away from entrapment and captivity. You are free when you own your life and become the captain of your ship.

According to the philosopher Isaiah Berlin, there is an important distinction between “freedom from” and “freedom to“. I will not do injustice to his great work and pretend I fully understood what he was talking about. But I will attempt to paraphrase it in a way that is meaningful to you. Being financially free will help you be free from and free to.

Freedom From

Being free from abuse and terror. If you are being abused or terrorized by your spouse, boss, etc for lack of money, then you need to become free from that form of abuse.
Freedom from fear and anxiety.
Freedom from punishment for past mistakes.
Freedom from boredom and restraint. If you are financially free, you can do whatever you want. You will have options. Seek ye money and freedom shall be yours.
Freedom from worrying about bills, deadlines and work pressures.

Freedom To

Freedom to achieve your goals and aspirations.
Freedom to travel to exotic destinations.
Freedom to live according to your true values.
Freedom to marry or date whoever you want without financial considerations.
Freedom to control your time, your calendar and priorities.
Freedom to work the hours you want and be your own boss.
Freedom to spend time with your family and loved ones.

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After watching countless episodes of MTV cribs, I noticed that none of the people in those houses have regular jobs. They did something extra and that is what gave them the financial muscle to do whatever they wanted, including owning the home worth being on MTV cribs.

Everyday you hear about the big pay that footballers earn. Then you hear about movie stars, internet entrepreneurs, mega church owners, business men etc. Have you ever stepped back and wondered what these people have in common? The results of my small research below is my treat to you. I hope it will trigger something in your head to help you be financially free.

I came up with five pillars to financial freedom. You should aim to master and utilize most of them if you aspire to get to the glory land of financial freedom.

Deliver Value

Passive Income

Leverage

The Power of Compounding

Build on your Successes

1. Deliver Value

You cannot be an honest person and make it financially without delivering value. Even drug dealers deliver value to their customers. You must find a need and fill it. Find someone who needs accommodation, and give him a house. Find someone who needs to get from A to B and take him there. Only then shall you make an honest buck.

Movie stars are paid for the entertainment they provide to millions around the world. Find your angle and deliver value from there. Give people something of value and they will be happy to pay for it. You are always either a consumer or producer of value at any one time. If you are reading my blog, you are the consumer and I am the producer. If you are watching Oprah, she is the producer and you are the consumer. If you are working for someone, they are the consumer and you are the producer.

In most cases, the consumers of value end up paying some times directly, sometimes indirectly. You need to think carefully what it is that you can provide to other people. You may not always be paid by them, but you need to understand and be in the game for you to play.

This game is all about value proposition. What is your value proposition? A value proposition is the total benefit which a vendor promises her consumers. What can you do for the next person? Ask not, what people can do for you, but rather what you can do for them.

2. Passive Income

You need to decouple yourself from the provision of value. Rapper 50 cent does not need to sing to my ear for me to pay for his music. Roger Federer does not get paid only for the hours he plays tennis. Why you should you be paid only when you work? Who told you that that is right or even fair on you?

You need to find ways of providing value without being there. Find something that someone needs and provide it to them. If you provide that value without necessarily being there, then that will set you apart from the other people.

Examples of of passive income are:

Rent – tenants don’t need (or want) their landlords there and yet will pay the rent. Be the landlord. Its a win win. You house a family, they pay you.
Royalties from books, movies, DVDs, Software etc
Earnings from businesses that does not require your direct involvement.
Dividends and interest from your wealth portfolio.

3. Leverage

According to Wikipedia, a lever is a rigid object that is used with an appropriate fulcrum or pivot point to multiply the mechanical force that can be applied to another object. You need to find a lever for you to leverage to attain financial freedom. Do not be just satisfied with providing value, use a lever to amplify your efforts.

You can magnify and multiply your abilities and value through other peoples time and resources. It is not as evil as it may sound. Writers use bookshops like Amazon to reach out to millions of customers. Musicians leverage the experience and resources of record companies. Home owners leverage the bank’s money to buy their home. Footballers leverage television.

Find something you can use to multiply your efforts and help you serve people better. I am leveraging the internet and the open source community to bring this message to you. I am leveraging the vast inventory of google ads to deliver targeted advertising on this blog.

If you are interested in the concept of leverage and how you can apply it to make grow your finances, read up on the works of Robert Kiyosaki or post in the comments section if you want me to write a full blog post on that.

4. The Power of Compounding

Albert Einstein is quoted as having said that the most powerful force in the universe is the concept of compound interest. You will attain financial freedom if you reinvest your profits.

Taking advantage of the power of compounding takes discipline and is best to start early. Create a financial plan and invest in financial instruments that reinvest your profits year in year out.

I will write a full blog post on the power of compounding in the future. For now, just know that compound interest can make a big difference in your financial fortunes.

Compound interest has a negative side. If you let credit card debt creep up on you, you can end up seeing the ugly side of compounding by paying more and more interest the longer you stay in debt. Avoid bad debt, it is a thief of financial freedom. Good debt can help you leverage other people’s money to meet your financial objectives.

5. Build on your Successes

Be thankful for each success you accomplish. Use each success as building blocks for your next success.

Invest in education, keep learning both from your mistakes and from the mistakes of others. Have a generous spirit. Do good with your success. Don’t be evil.

Summary

Money is not the answer to everything, but having financial freedom can help you avoid pain and increase pleasure. To be able to attain financial freedom, you have to focus on delivering value to others, decouple yourself from the actual work of it. Deliver value 24/7 and be paid for it. Find leverage and use the power of compounding to your advantage.

All the best in your quest for financial succces.