Make rational choices about your expenses and don’t take on debt.
Have you ever wondered how some people wind up in financial ruin?
Usually it’s simply because they make irrational financial decisions.
So how can you avoid this?
First of all, you need to make all decisions about expenses and costs using a realisticassessment of your personal needs and your financial circumstances.
For example, say you desperately want a new flashy car. You don’t really need it and buying it would require taking out a big loan on very unfavorable terms.
Clearly you should not get it, but let’s say you do anyway.
Now you’re using most of your income to pay off the interest, and eventually you hit the point when you should pay back the actual debt. You can’t afford it, so you take another loan just to pay off this one.
Just like that you’ve ended up in a debt spiral, and had better hope that the flash car is also comfortable to sleep in.
In fact, taking on debt in general is a bad idea, because you won’t be able to save up money to invest and accumulate wealth. Instead you’ll be spending your income on paying back the debt.
Perhaps somewhat surprisingly, this can also be bad for the creditors, because it deprives the debtors of the chance to increase their wealth. This makes them financially unstable, which can lead to them defaulting on the debt entirely – every creditor’s worst nightmare.
For example, in the recent Eurozone crisis, Greece was deeply indebted to the European Central Bank. The country had to make payments on that debt, so it could not invest in areas like schools, infrastructure, transport and so forth, which would be beneficial for the economy in the long term. Without these investments, the country would never attain the wealth to pay back the debts fully. This could lead to defaults that leave both parties worse off.
Thus in some cases it may be wise for creditors to suspend debt payments to let their debtors get back on their feet.