Debt has been a sad fact of life in the modern times. It has been piling up year after year. Even the governments of countries with the largest economies has loans falling due as time progresses. Even the wealthiest people have payables. Some of these two groups even have liabilities nearing to equaling their assets. In other words, many are in the brink of bankruptcy and even already are so. The same is true with individual persons.
Personal financial bankruptcy is part of the hard truth of debts. Many people went monetarily overdraft and are going this route. The reason behind is that they have managed their debts well. They have not controlled their accumulation of liabilities. Their inability to minimise their payables damaged their personal finance. To avoid this, we need to know to avoid debts.
Principles of Debt
The first step to avoiding debts is to be educated. People are continually amassing liabilities because of their ignorance. They do not know:
- The cause of debts
- The effects of debts
- That debts can be avoided
- The ways how to avoid debts
If and when people will be informed about these, there will be a great possibility that they will be able to avoid debts. Their personal finance will improve and they will be able to live a better life.
Policies and Projects
There is a need for massive and widespread education and information drive to cure people of the bankruptcy of their personal finance. If people will be informed and educated about the accounting and economic principles behind debt and personal finance, they will be more capable of making their finances healthy.
Not all people are able to study accounting and economics. Further, many of those who are so are not able to internalise and apply these. The lack of education and information can be addressed by introducing changes in the academe, profession and public policy. Legislation or government projects that will enforce the education of all people regarding personal finance can be created. If there are already such which are existing, they should be revisited and enforced.
Students, as early as high school should be taught personal finance. This should include the introduction the principles in accounting and economics that concretely build the foundation of personal finance. People, whatever their occupation or socio-economic standing in life should be informed about personal finance principles. They should be exposed to money management and life values enrichment. All these should be part of finance essays people read and write. The principles in them should be absorbed by the writers and readers and applied in real life.
Hand in hand with the education of fundamental accounting and economic principles which are essential in personal finance are the moral values that need to be imparted to the people. Money management and personal finance reflects the values people have in life. Moral deterioration and bankruptcy are the root cause of all personal finance deterioration and bankruptcy. Materialism and vanity have corrupted the minds and souls of people. The difficult times provide people with income that is insufficient for their high flying dreams. They resort to living beyond their means. Curing the moral decadence of the present times will solve the problem of financial bankruptcy. Building strong moral values within the younger generations will prepare them to be financially stable individuals.
Personal Finance Principles
1. Live within your means. Spend only on things you can afford with your actual income. Do not spend money you have not earned and received. In accounting, it is ASSETS = LIABILITIES + CAPITAL. When your liabilities grow bigger than your assets, you will be bankrupt because you will not be able to pay all of these debts even if you exhaust all your assets. Further, NET INCOME = GROSS INCOME - TOTAL EXPENSES. When your expenses is bigger than your gross income, you will not have any income and you will have a deficit.
2. Avoid debts. Stay away from applying for loans, purchases on account, credit cards and any forms of payables.
3. Debts come with interests. Any form of liabilities require you to pay for interest fees or finance charges which you pay because you use the money or its purchasing power both of which you do not have. in other words, you pay for them for using them.
4. Interest expense does not give you value. When you pay for interest charges, you pay in cash or in further credit. As mentioned, you are paying for the use of money or its purchasing power and you do not get anything or any value in return. It is like a one way transaction. You pay but you don’t get something.
5. Do not use debts to pay your debts. In other words, never get another loan to pay your old loans. You should be especially wary of this when you default on an existing loan because you may be forced or tricked into getting that new loan to catch up on the old one.
Debt is an ugly truth in life. It is a socio-economic problem. More so, it is a moral issue. It has rooted in the bottom of the morals of the society. Education and information is the solution to this bankruptcy of the people's personal finances and the bankruptcy of human morals. There is so much that needs to be done. We have to cure the sickness of the present generation and build the foundation for prevention for the coming ones. It might take a couple of centuries but there is still hope and we must start now.