Debt in its simplest form means you have more to pay than you have money to pay it. Let’s assume that you borrowed $150 from your best friend. You bought a lawn mower, gas can and gas to start work. Then you spent the day cutting grass and made $100. You bought more gas, some food and drink and paid your friend $50. At the end of the day, you are $100 in debt to your friend.
Most folks purchase large ticket items like houses, cars or boats using a lending institution to borrow the funds. And then, pay the loan back over time. If your paycheck stopped coming tomorrow would you be in debt? Could you sell your boat, car or house for at least what you paid for it? Rarely will a car or boat be sold for more than you paid for it. In a down economy, even a house may not sell for what you owe on it.
Getting into debt can happen suddenly; something unexpected happens. Or it can happen by choice; perhaps a choice made a year or so ago. But you can protect yourself by following this guideline.
There are 3 categories of spending: Needs, Wants, and Desires.
When you consider your spending (or borrowing) ask yourself the question: “Do I really need this?” Ask it again… Do I Really NEED this? What you really NEED is air to breath, water to drink, basic clothing to stay covered, basic housing, and basic transportation (and that doesn’t necessarily translate to a car).
Let’s assume you NEED reliable transportation to get to work. No bus service there and to walk or ride a bike would be simply ridiculous considering its 30 miles away.
Do you NEED a pre-owned VW Beetle, a mid-range vehicle, or a brand new BMW? You may NEED at least a VW Beetle to get to work. You would like or “WANT” a mid-range vehicle for more comfort. But your “DESIRE” may be a high-end BMW, Audi or Jag.
Quite simply, if you make your decisions based on NEED it will help you reduce or eliminate your debt. In other words, you will quit overspending on wants and desires and be able to use your extra income to pay off your debt.
There is a whole lot more to reducing or eliminating debt, but if you follow this simple rule, you will be on your way to becoming debt free.