This may sound simple yet so many people don’t do this.
Know how to handle debt.
We have to manage, health, work, school, family, and of course finances along with many more that may be unique to you.
In the spirit of simplifying our efforts to achieve higher levels of performance, let us understand why this system is set up in the first place and how to beat it.
It all begins with the financial systems. A foundational entity in our society that has evolved, grown, failed and risen again. The financial system, like many things, is a living entity that has its own characteristics to be aware of.
From observing the system we can extract key insights on how to best prepare ourselves.
The first I present is that the financial system, to a degree, is built on the business model of preying on your emotional relationship to money and effort.
The key instrument of question – debt.
The average American has $90,460 in debt, according to a 2021 CNBC report. That included all types of consumer debt products, from credit cards to personal loans, mortgages and student debt.
And if we look at the generational levels of debt, it reveals more;
“The average amount of debt by generation in 2020:
- Gen Z (ages 18 to 23): $16,043
- Millennials (ages 24 to 39): $87,448
- Gen X (ages 40 to 55): $140,643
- Baby boomers (ages 56 to 74): $97,290
- Silent generation (ages 75 and above): $41,281
You may likely be a person in some form of debt too.
The point here is that debt is a common denominator in the majority of people.
Yet the problem with debt is the issue of the lack of transparency, education and management of it at both a system and personal level.
From a study by the Bank of International Settlements, by Bengt Holmstrom, he reviews;
“perspective on the logic of credit markets [the market that makes money by lending money] and the structure of debt contracts that highlights the information insensitivity of debt.”
Furthermore adding, that:
“Because debt is information-insensitive as just discussed, traders [most technical people alike] have muted incentives to invest in information about debt.”
Meaning for you and I, as debt has become seamlessly integrated to our day to day in the form of loans, credit cards, mortgages etc- why then, is it difficult to understand at the investor and consumer level?
The term ‘information-insensitive’, I like because it explains how debt in general is poorly understood and transparent when it comes to its relationship to the larger stability of society.
The 2008 financial crisis was a good example of that.
Making financial tools over-complicated to navigate is a tactic used as a gap between wealthy and poor in my humble observation.
In another study, from the Berghahn Journals on the ‘The emergence of the global debt society’ by Ismael Vaccaro and others, he reinforces this idea of control with the following;
“Debt, however, is also much more. Its generalization as a framework of modern economic life has contributed to its transformation into a system of political domination that constrains citizens’ behavior, as the vast majority of them are also debtors: governmentality through debt”
Okay so debt is this dark cloud looming over your head. I apologize for the doom and gloom.
Though this topic is important, I will go deeper at its impact that it deserves in another article.
For now I wanted to set the scene of how debt is entrenched in our lives and why it’s a problem not many people talk about.
However, I want to shift gears to how you can take action to handle your debt.
These actions are designed to remove the mental energy of tracking the risk associated with your financial relationship to debt.
The good news is that they are not difficult to set up.
3 tips to use to remove the risk of defaulting.
- Use AUTO payment options to always have a set amount to be paid on time on your debt amount.
Most companies offer auto payments as part of their payment plans, and they prefer it because it is guaranteed income that they don’t have to chase you down for. Call into the business and ask about setting auto payments. Try not to pay the minimums since statistically over time, the principal [original] amount hardly ever gets reduced. Try to pay in full all debt collections every month.
2. If you are in serious debt, then taking control of your financial health is important. The best way is to begin paying yourself first. This means take a percentage of your income (10% minimum recommended) and pay yourself in the form of settling debts. Getting into this habit will also encourage saving and prioritizing money in the future.
3. Finally, comb through your credit cards and other loans and review where money is being spent. You’d be surprised which payments are being taken even if you are not using the service or product anymore. Once that is airtight, you are aware of what exactly you are paying off and why.
Discretion – I am of course no financial advisor, but I believe these tips are common sense. Please do your own research.
Avoid debt if you can, society is scarily built upon it. Knowing how you can limit and manage with preset automated options opens up more space to focus on other aspects of your life.
