DEBT TENDS TO play a pivotal role during the second stage of your financial life cycle. Depending on how debt is handled during this stage, you can either move smoothly on to the next stage or find that you are scrambling to survive financially, not quite making it comfortably into the next stage.Â
The wise approach would be to minimise the use of debt during the second stage, making it easier to transition to the next stage. However, many people are not willing to tolerate the delayed gratification and sense of sacrifice that will be needed to reduce the dependence on debt. So, they will use debt to expand their reach for material belongings and personal enjoyment.
The second stage of the financial life cycle is a period of transition where the young adults start to earn a living. In the early stages of this transition, they may still get continued, even if reduced, financial support from parents or guardians. Some adults never quite get past the partial reliance on the financial support of their parents or guardians completely.
In adulthood, money is needed for separate housing, furniture, a vehicle and other such possessions. Some of the funds needed may have to be borrowed. Gradually, the young adult may borrow more and more; such borrowing also serves to establish a personal credit rating. This is the phase in the debt cycle, when debt control can easily get out of hand.
Chain around neck
Even with care, there comes a time in the life of many adults when the debt burden seems like a ball and chain around the neck. Just to meet the mortgage, car payments and the instalment payments on the credit cards seems to absorb all of the available cash. Then, there may be young children to support and to educate. The monthly pay cheque tends to be fully spent well before receiving it.
This can represent an aggressive phase of debt. It is almost as if the debt has a mind of its own and is intent on killing the ordinary joys of day-to-day living. The debt burden in one’s life is usually at its peak during this stage. There may be occasions when it feels as though the weight of the debt is overly burdensome.
Yet, with progress in life and careful planning, the next phase begins when one can see the end of the tunnel – one sees the prospect of paying off the major portion of one’s debts and can look to strengthen plans for retirement with some of the excess cash.
Slowly, but surely, with self-control and with the normal pay increases over the years, one can manage to put a strong bit in the mouth of the racehorse called debt. The pity is that the use of debt has a certain allure every step of the way when one is going through this stage.
Desirable things
The acquisition of desirable material things and the enjoyment of life offerings can seem so affordable with just a bit more debt. It can be easy to get caught up and drown oneself in debt, never to recover.
Besides the management of cash during this stage of one’s financial life, the next key indicator of financial success is the way one manages debt during this second phase. When the cash earned is typically not enough, debt can expand one’s financial capacity during this stage.
So, one accepts that debt can play an important role in one’s financial development over a lifetime. Since that is so, one should specifically plan to make the best of the struggle with debt during this second stage of financial life.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: [email protected].
