photo credit: Nexeus Fatale
What is a debt spiral?
This is when the interest/repayments on loans reduce your available income so that you have to borrow more and more each month to keep up. It is a downward path that leads to serious financial problems and even bankruptcy.
Example
A family has a monthly income of 2000. Their monthly essential outgoings total 1500 so they have 500 each month to spend on non-essentials or to save.
They decide that they just must have a new car, the monthly cost is 300. They now have 200 each month to spend/save.
As they are working really hard, they feel that they deserve a holiday and put the 4,000 cost on a credit card. Monthly repayments are 200. They now have nothing left to spend each month.
But people can’t live without their little luxuries so they eat out and go to theme parks with their children and increase their credit card debt to 8,000 over the next year. New credit card repayment is 400 and they are now running a monthly deficit of 200.
If nothing is done about this situation the debt will grow more and more quickly as it compounds up/is added to. This process will only stop if the family realize that they need to take action or they are refused further credit. In the latter case the door to bankruptcy is open!
Be on Your Guard
The point of this post is to realize that the start of the debt spiral won’t seem like a problem at all. In fact it could seem like a really great day. You’ve rewarded yourself for all your hard work with a new car. That foreign holiday you’ve always dreamt of is now a reality.
If you are tempted to put luxuries/treats on credit then consider this thought:
“If you can’t afford the lifestyle you want now then how are you going to be able to afford it when you have extra credit bills to pay”?
Taking on credit when you don’t need to is stealing from your future. Consider the following rule:
“The only way to become wealthy is to spend less than you earn and invest the difference”
You should be able to clearly see that doing the opposite (spending more than you earn and borrowing the difference) is a certain way to being poorer in the future. Always ask yourself if you really need something before you buy it. Never buy large purchases on an impulse especially if they are going to be bought on credit.
Tags: Debt Advice, Debt Problems
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