Debt: What to do and what to avoid

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Debt can make goods more expensive to buy

The obvious example is vehicle finance. When you buy a car on credit for £6,000, you will pay almost £12,000 back on repayments. We challenge you to take any vehicle finance agreement that you have at the moment, calculate the total amount of money you will repay over the period of the loan, and compare it with the price of the car. It is bound to be almost double. That means the car has become more expensive to buy.

If you are buying everything you own on credit, everything you buy is more expensive than a person who saves and buys with cash. That person is buying the goods at a cheaper price, because he or she accrues interest on the savings before buying the product. You are funding that discount with the interest you pay on your loans.

The key to understanding and making the most of debt finance is to realise that loans are given out of deposits that the banks collect from customers who save. The bank has to keep a minimum amount of cash in its vaults to meet the demands of cash withdrawals. The rest can be given out as loans. The interest on the loans will always be more than the interest on the savings, so that the bank can make a profit. And this is how you fund interest paid to saving customers and ultimately the ‘discount’ they get by having the bank pay for a portion of the goods in return for cash deposits on which they can make a profit.

Which side of that fence would you like to be on?

Economic trends show that prices are likely to increase as demand for products increases. That is why it seems that families are unable to live in today’s world without incurring huge amounts of debt on homes and consumer goods. Put simply, the more money there is to spend, the more companies can ask for their goods.

Britain is famous for keeping inflation on the average shopping basket low. In other words, the government chancellor can argue that the prices of goods have not gone up whilst the economy keeps growing. But it is impossible, unless the population is growing, which it is not. The population is ageing, and immigration is increasing.

Immigration and tourism hides the real effect of inflation because these people bring foreign currency with them when they arrive, and spend it on the UK economy, helping it to grow. If there were no tourists and no immigrants, companies would have to charge higher prices for goods to make the same level of profits.

What the government does not include in the calculation of inflation is the cost of living accommodation, which has shot through the roof. The most alarming fact that the government conceals from these wonderful statistics is that personal bankcruptcies and IVA’s are also going through the roof. We are funding consumer spending with mortgages and people are loosing everything they own in the process.

This number is growing.

Whilst profits of banks are hitting record levels, people on the street can no longer afford the cost of living.

Malaga