Understanding the Psyche Behind Debt Elimination

What is debt?

According to Investopedia, debt is the following:

An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Definition of Debt

Maybe it is a new TV?  Maybe it is a new car?  Basically debt takes on many forms depending on the person who makes the purchases.  At any rate, debt is a bad thing...or is it?  Sometimes debt is necessary to make progress in life.  Sometimes it is needed in the form of a mortgage.  Sometimes it may be needed in order to pay for medical bills and save a life.  At any rate, for most Americans, debt is a way of life.  Although many of the popular TV analyst swear up and down that debt caused the economy to be in the state that it is today, I disagree.

I believe that one of the causes of this particular situation is due to the fact that Americans have lost control of their debt.  It seems like we stopped using debt as a means to secure a home or buy a reasonable car and instead purchase clothes, tvs and other luxuries that almost immediately lose value.  Contrary to the way most people use credit, it seems like as far as I could remember, my parents never had that problem.

It seems like my parents never really had a problem with credit.  They never bought lavish luxuries such as TVs or furniture.  They simply got their mortgage, got their car and followed the rules to pay their minimum payment on time.  However, using this method, it just seemed like my parents were always sending out checks to creditors to make a payment.  Throughout my whole life, I could not remember a point at which my parents never had to send out a check to pay for some kind of debt.  

Although my parents never really complained about debt or money, I am sure they wished that they were not in it as long as they were so they could have done more.  It seems like today, our mindset has changed to eradicate debt and become debt-free as soon as possible.  In an attempt to find out what is different between when they used credit and what we do today, I had a conversation with my friend who is currently working on becoming debt free.

During the conversation with my friend about her progress on eliminating her debt, she explained to me that it is important for her to get rid of her debt.  She explained to me the following points she has understood to help herself to become debt free:

1. It is hard to start paying when the debt seems to be so much
• Debt is so easy to obtain that before you know it, you are over your head in no time.
• Over time, anything can be accomplished, but you have to chip away at it.
2. A budget is necessary in order to make progress.
   
• The first step to controlling spending is identifying where the money is going.
• A budget allows for the pre-allocation of funds.
3. Paying the minimum is just not enough.
   
• Just as compound interest works in your favor when you are lending your money, it works against you when you are borrowing.
• Paying more than the minimum specified amount reduces the amount you will be paying on the loan as well as the time that you spend paying the loan back.
4. Seeing progress helps with following through on the plan.
   
• Achieving small goals allow for a sense of accomplishment.
• Setting a goal and achieving it propels you forward to continue with the plan.
5. The potential from the freed income is limitless.
   
• The new income allows for money to be allocated for investing or other projects.

From discussing these points, I understand that situations and mindsets are different.  Although my parents did not mind having debt, they did not use it as a tool to buy furniture, TVs or other "luxuries".  However, my friend used her credit to make purchases for her home comforts.  The difference between the two is that in this day and time, it is a general consensus that debt is necessary but needs to be eliminated as soon as possible.  What do you think?

Stay Disciplined!