"I'm sorry, but we are going to cut your pay."
What would you say? What would you do?
You are the boss of yourself, and every time you make choices that lead to you not paying off debt or taking on unnecessary debt for assets that depreciate in value, you are giving your future self a pay-cut.
"WHAT???" I hear you say. Allow me to explain by means of a hypothetical example.
Mrs Buyeverything can't be bothered to make her lunch at home to take to work. Instead she likes to buy lunch every day. She spends between $10 and $20 on lunch each day, but for simplicity lets say she only spends $10. Mrs Buyeverything also has a credit card (@ 15% p.a.) with a perpetual balance because "payments are small and I can't afford to pay it all off right now". Little does he realise her $10 lunch actually cost her $11.50 and will cost her another $1.50 every year until her credit card debt has been paid off. Mrs Buyeverything is a good worker and goes to work 5 days a week, or 260 days a year. By buying lunch every day, she is giving herself a recurring pay-cut of $390. Throw in coffee, a weekly drinking session at a club, etc and the numbers quickly add up. For the sake of simplicity I've ignored compounding, but I promise once compounding is factored in the reality is actually worse!
If you were to go back in time far enough and tell people that you borrowed money to buy things that depreciated (go down) in value they would do one of two things. 1) Punch you in the face for being a moron or 2) try and scam money from you because, clearly, you are a moron.
Maybe (hopefully) you are asking yourself "so how much of a pay cut am I giving myself?". The answer is really easy. Look at your depreciating asset debt (credit card/car loan/financed furniture/etc) and calculate the interest paid on the debt. The interest you pay each year is the value of your pay-cut.
Once your debt is paid off, you can turn this idea of "giving yourself a pay-cut" on it's head and instead "give yourself a pay-rise". How? Easy! Invest the money. Buy property, buy indexed shares, put it in a savings account, educate yourself, make extra superannuation payments. All of these strategies will, in the long run, result in YOU having more money in your pocket and allow you to retire years or even decades earlier.
One of the great misconceptions in life is that banks lend you money. They don't. You are actually borrowing money from your future self. When you take out a loan banks literally create money out of thin air by adding a few zeroes to your account, which you promise to pay for with your future income. The banks are also kind enough to charge you interest to borrow money from your future self. Aren't they nice? This video explains in detail how money is created in our modern financial system. It's an excellent video I highly recommend watching.
