If you ever feel as though the world’s financial system is stacked against you, you’re not wrong. It is!
Our planet’s tightly integrated value-creating economic juggernaut has lifted billions of people out of abject poverty, which is fabulous. Nonetheless, the system is massively flawed in two ways:
1. Global and national GDP growth hinges on credit expansion; and
2. Credit expansion plunges most people, businesses and countries ever deeper into debt.
Those major flaws mean that for all of humanity’s successes in growing total wealth worldwide, the snowballing credit expansion we require to keep our planetary economic machinery humming causes global wealth distribution to grow ever more skewed toward the super-wealthy.
Thankfully, people at the bottom tiers are not growing poorer in absolute terms. (How often have you seen relatively low paid foreign construction workers squatting by the roadside using a high tech smartphone?) Nonetheless, the lower demographic slices are growing relatively poorer compared to the dense, dangerous and destabilising accretion of obscene wealth within the vaults and portfolios of the upper slices of humanity.
Grow Your Own Riches
We can help spread out some of that wealth by learning how to grow our own riches. To succeed, two things should be done:
1. Accumulate productive assets. (I wrote on this last week; if you’d like to read that column first, please do so here: www.nst.com.my/authors/rajen-devadason);
2. Slash and analyse all your outstanding debts, which form your current liability base. For each loan you are the debtor and, somewhere ‘out there’, is a specific creditor.
As you ethically and uprightly repay every loan you've ever taken out regularly and on time, note that within each (let’s say) monthly repayment is a principal portion and an interest portion.
The higher the interest rate you’re being charged, the larger the interest portion in RM terms. Thus, for a fixed regular monthly repayment quantum, the higher your interest charge, the smaller your principal repayment. Obviously, if we just pay back a tiny bit of the principal borrowed each time, it will take us ages to fully repay that loan. Over those long years we’ll be enriching the creditor.
In your mind's eye, now zoom out from this microscopic example of just one person (you) paying one creditor one monthly repayment, and try to wrap your fertile mind around many billions of such transactions each month, year in, year out! All those repayments are funded by us debtors in only one of three ways. From:
1. Active income we toil to earn;
2. The sale of our assets; or
3. Fresh borrowings!
Take a minute to think through what happens in each scenario. Can you see how in the first two scenarios – repayments using debtors’ salaries, say, or the proceeds from the sale of debtors’ assets – wealth in the form of cash is channelled from the debtors’ asset pile to the creditors? In the third – and absolute worst – scenario, debtors tunnel themselves ever deeper into a pit of liabilities by borrowing ever more money.
That’s why the rich get richer and the poor grow relatively poorer every single day! So, to join the smaller winning group, manage your liabilities better. Begin by listing them all down...twice.
Slash-and-Analyse
First, rank all your debts in order of annualised interest charge (meaning APR or annualised percentage rate) from the highest APR to the lowest. Second, rank them all again, but this time in order of size, from smallest loan outstanding to largest.
As you reread both lists, ask which assets you own yet hardly use or even derive satisfaction from. Then sell them to raise cash to pay off, or at least pay down, some of your most expensive or smallest loans.
In addition to generally slashing you liabilities, you should also analyse each liability and ask yourself whether it really is a ‘good’ or ‘bad’ debt. Does that loan make you richer or poorer each month?
If it makes you richer – perhaps because it is linked to a rental property mortgage that costs you RM2,000 a month but that brings in RM2,300 a month in rent – then delay paying off that good loan.
But if it makes you poorer every month – perhaps because you’re carrying RM30,000 in expensive credit card debt spent on, say, now useless stuff around the house like abandoned exercise equipment – then hurry up repaying that bad loan.
Ask yourself if you’re hoarding junk, specifically items that no longer fill you with even an iota of delight or that do not bring in more money than they cost to maintain. If so, consider selling some or all of your junk to raise special wads of cash earmarked specifically to slash your debts!
This consumption-focused world we inhabit here and now causes most of us to buy too many things that serve too little purpose. So decide what to sell today to pay down your existing ‘debts’ tomorrow.
As you do all that, I hope my dual slash-and-analyse debt management model will help you lift yourself one rung at a time up our world’s socioeconomic ladder by profoundly improving your ability to make wise cash flow sensitive decisions. I wish you the greatest of success.
Next week we’ll consider pragmatic strategies to nurture our net worth.
© 2019 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason