How to swim in a sea of money
Posted by Faith, 8 September 2009
Amber frowned as she said to me, "I can't understand where I've gone wrong, Faith."
"Could you tell me what you mean by 'gone wrong', please?"
"I seem to owe money everywhere and I'm having trouble paying it off. I've followed the best advice about money, so why hasn't it worked for me?"
I asked her who she had been talking to.
"My Dad used to help me. He's dead now but he was a great businessman and he always said that he got ahead by using OBM."
"OBM?"
"That's what he called it. It stands for 'other buggers' money'. 'Scuse the language, Faith."
"OK, so how do you think this OBM works?"
"Well, I'm not really sure but I think it is where you never pay cash for anything and you always borrow money for everything you buy."
No wonder Amber was in trouble with her money. It appeared that she had either misunderstood the concept, or simply applied a good lesson to the wrong situation.
If her father ran a successful business, he would have used OBM to borrow money (at low or free interest rates) or he would have arranged a delayed payment for purchases in order to make money. It works like this:
- Buy goods (to resell them) with a delayed payment date for Amber's Dad. He would then on-sell them at a higher rate (such as in a shop) and be paid immediately by his customers. This would provide cash for Amber's Dad to later pay for the goods he'd bought, and he would keep the additional profit for himself. This is a great example of how to use OBM. Business people and retailers work like this all of the time.
- Borrow to buy something that increases in value over the long term (such as a house or property). While this would mean that Amber's Dad would have to pay some interest costs on the money borrowed, the item would increase in value over time (by more than the amount borrowed).
- Borrowing to buy an expensive business machine that made goods for Amber's Dad in a way that was cheaper and faster than his usual method. This would mean he could sell more goods and with greater profit, which he'd use to help pay for the machine. The Inland Revenue would also let him deduct the interest cost (for the business machine) as a legitimate expense and therefore he would pay less tax on his income.
The above examples all use OBM and are known as "good debt". The borrower understands that there are costs in borrowing money, but if their purchase increases in value over time, or it makes their business much more profitable, then it can be worth the interest costs paid.
Unfortunately for Amber, it was the case of 'a little learning is a dangerous thing'. She had mistakenly thought that OBM meant she should always borrow money, regardless of the circumstances.
So, Amber ended up with big debts for consumer items (things like TV's and cars), which go down in value over time. This is called 'bad debt'. She also didn't understand that her father was in business and therefore he bought things to on-sell to his customers, whereas Amber was just buying for her own wants. She had to pay for the items with all of her own money AND was paying high interest costs as well.
Once I'd explained the real meaning of OBM to Amber, we worked out a plan to reduce her debts. With my help she agreed to:
- Set priorities for her spending in order to free up money to pay debt.
- Put a small amount aside each pay day to build up an emergency fund for unexpected bills (such as a big expensive car repair).
- Set a debt-free date and plan a fun activity as a reward for getting there.
- Pay off the most expensive debt first (the one with the highest interest rate)
- Switch remaining debt to an arrangement with lower interest costs (if possible).
- After debt-free day, channel the money she had used to pay debt into a savings plan according to her dreams and goals
- Review the plan regularly with me as her financial adviser.
Amber told me that her long-term goal is to travel to Europe and I'm sure she'll get there with the plan above. Once she pays off her 'bad debts' she will have more to put towards her trip because she won't be losing so much money in interest costs.
Everyone can benefit from knowing how to manage debt. However, don't let a "little learning" sink you - visit a financial adviser and learn how to swim with your money.
Financial Awareness Week in September (6 to 13th)
Manage your debt - Swim, Don't Sink is the 4th of 6 key steps promoted as part of Financial Awareness Week:
http://www.financialawarenessweek.co.nz/financial-planning/steps/step4.php
Please visit this special website at http://www.financialawarenessweek.co.nz/ for more information or to find a financial adviser near you.
Find out about how to win a free trip to Europe.
Want more out of your life and money? Then buy my book Keeping the Faith - Travel the World. Beware - it is very powerful! It was awarded a top 5-star rating by the on-line financial bookstore Good Returns, along with the warning: "This book changes lives." Click here to buy Keeping the Faith - Travel the World.
See previous blogs:
Don't sweat the small stuff.
Can you grow a money tree?
What's holding you back?
Money or your life - which has more value?
The seven secret thieves
Five questions to change your life
Find that spark
Switching lives - what would you choose?
Who can I trust to help grow my money?
How to swim in a sea of money
Life can be unfair
The rule of happiness
No way to live
Anyone can be good with money
Best ways to warm up winter
Who wants to be a millionaire?
The secret of wealth
Keeping your money safe
Having it all
Win an all-expenses-paid trip for two to Europe (Part 3)
Win an all-expenses-paid trip for two to Europe (Part 2)
Win an all-expenses-paid trip for two to Europe (Part 1)
Make a change for good
A recipe for a happy Christmas
Nothing else matters
Rage, rage against the dying of the light
Make a wish come true
Buying or Selling a House – Those that care least, usually succeed
When is a good time to buy a house?
Sleepless Nights in a War Zone
Transitions - more life or more of the “same old, same old” boring stuff?