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Escaping Debt Slavery

by Rajen Devadason

Ralph Waldo Emerson

The book from which the excerpt below comes from was written a few years ago for a largely Malaysian audience. So, if you happen to live in Malaysia, then it will have maximum relevance. But even if you don't live in this equatorial paradise, you can still benefit greatly by focusing on the key principles outlined at the end of this piece.

Winston Churchill once observed, "Sometimes it is not good enough to do your best; you have to do what’s required."

In terms of getting your financial house in order, are you doing just that?

As you read this brief book excerpt, I want you to put yourself in the shoes of Iskandar. If they fit, pay close attention to the key debt management principles at the end of this article...

Malaysians generally fall into one of two categories when it comes to having an opinion on the Kuala Lumpur City Centre Twin Towers. As with durians, cheese and American-style free speech, you either love or hate the Twin Towers.

However, a few years ago, the few who found themselves on the fence concerning what were the world’s tallest buildings – until late 2003, when the Taiwanese completed an even taller skyscraper – fell in love with them after seeing the beautiful Catherine Zeta-Jones cavort around the structure with Sean Connery, in the 1999 action-heist movie Entrapment.

Nowadays, in these still early years of the 21st century, even in the absence of the greatest ex-James Bond and the current Mrs. Michael Douglas, the Towers look spectacular. On days when the weather is kind, when the sun blazes and the haze beats a hasty retreat, visibility goes on for miles and miles. Today is one such day.

The view outside Iskandar’s office, two-thirds of the way up one of the Towers, is stupendous. Most of the Klang Valley is sprawled below him in mute testimony to the vigour of one of Southeast Asia’s greatest capitals. As the natural sun sets, the artificial lights powered through Tenaga Nasional’s electricity grid come on. It is a sight to behold. But, working late as usual, the riveting scenario fails to captivate Iskandar.

How can it? He isn’t even looking out!

Iskandar’s at his desk, with furrowed brow, still thinking about his latest credit card statement. Some background might be useful:

Iskandar isn’t married. Thankfully, being single doesn’t upset him in the least. On the contrary, at 28, Iskandar is quite the lad about town! He’s got a great job, earns RM10,000 a month and is loved by everyone, especially the delightful ladies he meets with great regularity at KL’s hottest nightspots.

However, Iskandar has a secret problem he’s, so far, succeeded in keeping hidden from all his friends and family (except for one other person, but we’ll come to him later).

What’s important to realise is that for all his trappings of success, the size of his salary and his world-class working environment, Iskandar is a debt-oholic of ponderous proportions. Not physically, of course, but fiscally.

ISKANDAR’S PIT OF DEBT

Just how bad are things? Well, let’s say if he kept track of his month-to-month expenses (which he hasn’t), Iskandar would realise that he has been in fiscal imbalance – with expenses exceeding income – for every month of the last three years. But, naturally enough, young, fast-track executives have a proven capacity for eliciting the approval of credit officers.

That’s why, up to now, Iskandar has been able to fund this persistent, and growing deficit, by applying for a fresh credit card every six months, or so. But there is a truism of financial planning that Iskandar has never heard: Unless you’re the government – with the power to print money, as long as you don’t mind fuelling inflation – you shouldn’t indulge in long-term deficit funding.

Therefore, till now Iskandar’s modus operandi has been to use a credit card until its credit limit is close to the ceiling and then apply for another one.

Today he is the ‘proud’ possessor of seven credit cards, four of them ‘gold’, with average individual balances of RM15,000. He owes a total of RM105,000 on them. That’s more than 10 per cent of a million ringgit, all in unsecured, expensive debt. How did Iskandar manage such a stupendously stupid feat?

Well, without trying to sound (too) facetious, he did it the same way you would eat an elephant.

One small bite at a time! Or more correctly in Iskandar’s case one small fiscal indiscretion at a time. Over the last few years, Iskandar has gradually grown accustomed to tolerating ever-higher monthly interest charges. Sadly, the imperceptible increases have snowballed into a monthly credit card interest total that amounts to more than 15% of his pre-tax salary.

If you’re in the mood for a switch of metaphors from a large mammal to a small amphibian, you’ll understand that Iskandar’s gradual increase in interest charges can readily be likened to the best way to boil a living frog. (Stick with me; this is not some irrelevant, gruesome product of a sick mind, but a most relevant – albeit yucky – analogy for you to carry inside your skull.)

If you were to pick up a frog from your garden and just chuck it into a shallow pot of really hot water, it would immediately react to the scalding by jumping out to safety. (Way to go, Kermit!)

However, if you were to pick up the same frog a little later and put it in a shallow pot of cold water, its reaction would be different. Because it is cold-blooded, and since the water’s temperature closely matches that of its body, the frog will contentedly sit in the water. So far, all is well in the frog’s little, wet world.

But if you were then to play the ‘evil, sicko cook’, you would surreptitiously move the pot onto a very, very slow fire. Result: The water’s temperature would rise slowly. But surely – up to 100 degrees Celsius!

Now, being accommodatingly cold-blooded, the frog’s body will adapt to the rising heat. It is in its nature to match its blood’s temperature to that of its surroundings. And, for a little while, that will be fine. But, long before the water reaches boiling point, the frog will have adapted itself to death.

If you haven’t lost your appetite (for reading, at least), before we continue with the sorry tale of Iskandar and his seven credit cards, just remember a guiding principle that we will constantly hearken back to in this book:

The key to reaching financial freedom is to focus on strengthening your net worth statement.

I hope you enjoyed that excerpt. If you'd like to improve your economic future by investing in a copy of my book Liberty! From Debt-Slave to Money Master, 2nd Edition 2004 just drop me a line at: sales@RajenDevadason.com with the words: Rajen, I need to get Liberty! in your subject header.

But please do remember to clear yourself through my spam filter, otherwise your email will never reach me.

Now, onto vital material you must absorb...

3 Key Principles To Heed

When it comes to dealing intelligently with debt, I urge you to read, study, memorise and apply within your life these 3 key principles:

1. Ask yourself why you are borrowing this money - is it for unjustified consumption or to make you richer?

2. Work out - or have someone else do so for you - the exact APR (annualised percentage rate) or EIR (effective interest rate) of the loan.

3. Based on that correct assessment of the actual cost of the money you plan to borrow, ask yourself if this loan stands a good chance of helping you grow your net worth. If your answer is no, don't borrow the money. If your answer is yes, by all means go ahead. If you aren't sure, then take the time to become sure!

© Rajen Devadason