Archive for March 18, 2012

Social responsibility and the current debt crisis

A lot of people think that the recent debt crisis is due to a lack of social responsibility and that an even greater debt problem looms over the horizon. Economic experts today are divided as to what the solution should be, as the solutions being advocated today will benefit one industry while destroying another. For example, the banking industry is advocating for increased credit and thus spending to pay back previous debts while on the other side of the spectrum, Austrian economists state that an increase in credit further exacerbates the debt problem.

Recently the rate of bankruptcy has increased considerably and therefore lenders are making an effort to cooperate with credit repair businesses in order to avoid such scenarios. Fear and greed cripples the marketplace and traders don’t know what to do, or even what to say to the general public. This in turn evokes uncertainty and is causing credit card usage to soar to record levels. This public mentality can be seen in the general rise of impulse buying where consumers purchase goods like cheerleading uniforms as opposed to purchasing assets that will yield a return on an investment. The amount of debt fueled by easy credit will take a toll on society once our ability to produce can no longer sustain the interest payments incurred by debt.

Financial institutions have a responsibility to the general public by laying down the foundations of what can and cannot be borrowed. In turn, we as a society are responsible for the actions we take and ultimately we are the ones that will determine how the debt crisis ends.

Bankruptcy as an End to Debt

As the recent recession spreads and increasing numbers of people are finding themselves unable to keep up with their debt schedules, bankruptcy has increasingly become an option.  While filing for bankruptcy has negative connotations, in fact it serves as a reprieve from mounting financial pressures.  The deeper into debt one becomes, the harder it is to find a way to alleviate compounding late fees and penalties.  Bankruptcy provides a solution to the seemingly endless cycle of increasing debt that many people are stuck in today.

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The best way to avoid falling into debt is to decrease spending on “luxury” items.  We have been taught to use credit cards as a way to get what we want, when we want it, rather than saving money and buying things we can afford with money we have.  Credit cards can be a valuable economic resource, but only if used wisely.  It is best to pay off lines of credit immediately.  This positively effects credit-rating and also ensures that the purchaser will not be subject to inflated interest rates later on.  The issuers of credit cards make their profit on continuously charging interest on the same money over and over.  Failing to pay off significant amounts of a credit line leads to financial disaster if the same technique is applied multiple times.  Pretty soon the debtor will find themselves in over their head, buried in an avalanche of increased rates and fees.

Filing bankruptcy can put a stop to the whirlpool of financial despair.  Consolidating your debt and applying a structured re-payment plan can be effective, but in the hands of a qualified bankruptcy expert, not only can you learn how to understand your debt, but also reduce the amount that you owe.  There is no shame in seeking bankruptcy.  It is, simply put, often the most financially responsible action that someone with debt can seek.

Reference

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Personal Responsibility the Answer to World Financial Woes

Lost in much of the conversation about the issues that impede the world economy is the concept of personal financial responsibility.  The sub-prime mortgage crisis in the United States, for example was blamed largely on banks giving loans to unqualified consumers.  What about the responsibility of consumers themselves to not take out a loan they may have a hard time paying back?

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It’s important that consumers take charge of their own financial well-being.  A compound interest calculator is a great way for people to understand how money compounds and how loan interest can really grow over time.

A compound interest calculator allows you to take charge of your finances. If you are borrowing money, you have to understand exactly how much you are going to have to pay back. For investors, it is just as important to be able to work out what return you will get on your money.

You need to be aware of the difference between simple and compound interest. Simple interest accrues interest on the amount lent or invested (the principal) at an agreed rate. With compound interest, interest is added to the principal in each compounding period, and itself earns interest in the next period. Interest can be compounded on a daily, monthly, quarterly, or annual basis.

The total amount of money grows more quickly with compound than with simple interest. The type of interest is therefore an important factor to take into account when making financial decisions. Investors should take careful note of the interest rate offered, as well as whether it is compound or simple, and the basis of compounding. They can then use one of the many online compound interest calculators available to compare the different products on offer.

Checking the total amount payable becomes even more important when you are taking out a loan. This is particularly true if you are making an important purchasing decision, such as buying a house, which will involve a large amount of money over a long period of time. Both you and the lender need to be sure that you will be able to afford the payments, and this is why it is essential to work out the total amount you will have to pay. Remember that you will pay a greater amount if the loan is extended over a longer term.

Credit cards are another form of borrowing where you should be aware of exactly how much you are paying. If you do not pay the full amount owing each month, interest is added to the balance and compounded on a daily basis. Daily compound interest calculators are available to allow you to check the true cost of your finance, have a quick look at the Money Programme on the BBC for example – you can watch Iplayer abroad using this.

Whatever the nature of the financial decisions you are making, it pays to be well informed. This means knowing the type of interest you are receiving or paying, and understanding how this will affect the end result. Always make sure that you use a compound interest calculator to help you make informed decisions.