False economy What’s in it for me? Understand what makes the

Make rational choices about your expenses 
and don’t take on debt.
Have you ever wondered how some people wind 
up in financial ruin?
Usually it’s simply because they make irrational 
financial decisions.

---

So how can you avoid this?
First of all, you need to make all decisions about 
expenses and costs using a realistic assessment 
of your personal needs and your financial 
circumstances.
For example, say you desperately want a new 
flashy car. You don’t really need it and buying it 
would require taking out a big loan on very 
unfavorable terms.
Clearly you should not get it, but let’s say you do 
anyway.
Now you’re using most of your income to pay off 
the interest, and eventually you hit the point 
when you should pay back the actual debt. You 
can’t afford it, so you take another loan just to 
pay off this one.
Just like that you’ve ended up in a debt spiral, 
and had better hope that the flash car is also 
comfortable to sleep in.
In fact, taking on debt in general is a bad idea, 
because you won’t be able to save up money to 
invest and accumulate wealth. Instead you’ll be 
spending your income on paying back the debt.
Perhaps somewhat surprisingly, this can also be 
bad for the creditors, because it deprives the 
debtors of the chance to increase their wealth. 
This makes them financially unstable, which can 
lead to them defaulting on the debt entirely – 
every creditor’s worst nightmare.
For example, in the recent Eurozone crisis, 
Greece was deeply indebted to the European 
Central Bank. The country had to make 
payments on that debt, so it could not invest in 
areas like schools, infrastructure, transport and 
so forth, which would be beneficial for the 
economy in the long term. Without these 
investments, the country would never attain the 
wealth to pay back the debts fully. This could 
lead to defaults that leave both parties worse off.
Thus in some cases it may be wise for creditors 
to suspend debt payments to let their debtors 
get back on their feet.