If there’s one thing I can teach you about money, whether you’re six, a teenager, a student, or an adult, it’s this golden rule. A company’s job is to make money from you. Your job is to stop it. Now I’m not anti-company. Their job is to make profits. I 1)applaud them. That works. You’re gonna work for a company in your life. Your job ought to be to make profit, too. But you are the only person who has a responsibility to protect yourself. Getting your money right is not a 2)segregated issue that only affects you and your money. It is something that incorporates your whole life.
So what I want to do today is just try and make you think a little bit about that. Let’s start with debt. Good debt, bad debt.
Debt needs to be planned for, budgeted for, rational, and as cheap as it can possibly be. Those are the key concepts.
So now let’s move on to student finance and apply the same logic.
Debt No.1: the official student loan, provided by the government. This is at a rate of interest which matches 3)inflation. Inflation is the rate at which prices rise. So, if I go into the supermarket this week with my 4)trolley and I put a hundred 5)quid’s worth of stuff in and inflation is 10%, what rate will I pay…how much will I pay for that trolley the next year? Hundred and ten pounds: 10% 6)on top of a hundred quid.
So, if I borrowed money at a hundred pounds this year and the interest rate is set at the rate of inflation, which we’ll 7)nominally say is 10%, because it makes the maths more easy, next year I owe 110 quid. Sounds like I’m paying. But in real terms I’ve borrowed a shopping trolley’s worth of goods and I’m repaying a shopping trolley’s worth of goods. The amount of money in my pocket, my spending power, has not been decreased.
Student loans are the longest, the cheapest long-term debt you will ever be offered. So, you can borrow this money at no real cost to you. Is it good debt? Of course it bloody is!
Let’s take a look at the next thing that’s on the list. There’s the nightmare. Credit cards, commercial debt, other types of borrowing, other types of loans charged at real interest rates that will trap you in. Right, here’s a question. I have £3,000 on a 8)high street credit card at 17.9% interest. The minimum repayments I must make are £5 a month or 2% of my 9)outstanding borrowing. How long will it take me to pay that card off if I only make the minimum repayments? Not “never”! You will pay it off. Fourty-one years—actually 40 years 8 months: you’re good—at an interest cost of £6,300. Credit cards minimum repayments are designed to keep you 10)perpetually in debt. They are the enemy!
So this is the first lesson. I am not here to tell you “Do not borrow.” I’m here to say, “Student loans: Good! Commercial debt: Bad!” So let’s start to understand and think carefully about what you can do with your money.