Managing your borrowing needs

Thriftiness is back. The present crisis was created by a gluttonous appetite for debt, and the bubble bust lead to many losing much. Some even went into negative equity. As a result, a lot of books and website are promoting a come back to good old values: live within your means, reimburse your debts and prepare for the future.

The switch from a consumerist mentality to a thrifty one is not easy. The first step usually is to understand the basics of borrowing and why you should strive to only get into debt when it is necessary; and only only borrow the needed amount. If you keep in mind the following pointers, you should be on the right track:

• When you take a loan, you will be repaying it with your future income
• The longer you wait to reimburse your debt, the more you end up reimbursing
• Credit cards and other unsecured credit are the most expensive credit you can get
• When you get into long term debt – i.e. car or house financing – your early instalment are always used to repay interest first, principal second
• You should never use more than 35% of your take-home income to reimburse debt. This 35% includes paying off your car and your home.