The Secret of Debt Repayment
Having worked as a Financial Advisor for one of the largest banks in the world (by market capitalization), it came to me as something of a surprise recently that so many people who borrow money want to know the so-called secret of debt repayment. Why do we call it a secret?
Well, let's first establish that there are two reasons why we call it the "Secret of Debt Repayment" which we will address first. Coincidentally, there are also <b>two</b> so-called secrets to debt repayment, which we will discuss secondarily.
The first reason why we call it a "secret" is that nobody talks about it. When nobody talks about something, it must be a secret, right? The second reason we call it a secret is that nobody asks about it, outright. When was the last time you have asked your banker for the Secret? You are better off asking her how much she earns in any given year!
As bankers, we take for granted that most of the people we deal with, including our colleagues, have not taken formal courses on personal finance management. Therefore, we often expect that people already know this secret of debt repayment. In reality, people don't. And they don't ask because they are too embarrassed to asked, the same way they are embarrassed to talk to their health practitioners about some of their private and intimate health details.
Now, about the first secret. (Drumroll please).
1. You can only repay debt by allocating funds toward debt. That means you must create enough of a surplus at the end of each month to allocate to your debt. For most people who are "strapped" financially, this means increasing income, reducing expenses, or both. By increasing income, people can either get a better-paying job or they can take on a second job. By reducing income, people can take a hard, close look at where they spend each dollar every month and devise a plan to reduce the amount they spend in the following month.
2. There is no secret of debt repayment. The information above is nothing new. Bankers don't keep this secret from their clients. However, bankers can do a better job of educating their clients about how to manage debt. When it comes to refinancing a mortgage or consolidating a client's debt through a consolidation loan, the banker should inform her clients that this is not the secret. The secret is better management. The secret is avoiding consumer debt and repaying the loan and/or mortgage and achieving a debt-free lifestyle.
See, the secret of debt repayment is really the concept of "living within our means." We forget about this concept every time we receive a credit card offer, every time we see a "no pay until eternity" offer, every time a neighbor comes home with a new toy. The secret of debt repayment isn't really a secret it at all; it's something we should practice in our financial lives... every day.
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