Is Debt Really Dumb? : An honest look | Financing in minutes
There are several columns, I asked the question: what if you had no debt payment? For many Americans, this is a life-changing idea, something they may not have considered before, because the idea that you have to go into debt to live the life you want ( or to be like your friends) is so pervasive in our culture today. We have been conditioned to the idea that debt is the only way to pay for an education, or a car that runs well, or to buy things, or to do the things that “everybody” does.
This idea is wrong. You don’t need to go into debt to finance your lifestyle, regardless of your income. Some short-term sacrifice will likely be necessary to create long-term stability, but I’m speaking from experience – it can be done and it is worth it.
The best way to increase your net worth is to invest in appreciating assets (like a retirement or taxable investments, a house, etc.) (TVs, vehicles and other physical items). The best way to do this is with your income, and if your income is tied to paying off your debts each month, it will be slow and difficult to gain ground to become financially secure.
I wouldn’t necessarily say, from a moral point of view, that it’s wrong to be in debt. However, debt puts you at a financial disadvantage compared to those who move at the speed of money, and it’s not too hard to see why: if your income is mainly used to pay, not only are you paying money. hard earned money for the privilege of borrowing money, you are wasting precious time that your income could have been invested and compounded. You also lose out on other opportunities, such as taking a vacation with cash instead of putting it on the credit card, or other things that you would really appreciate if you had the cash resources to fund them.
Have you ever wondered why even people with six-figure incomes live paycheck to paycheck or can’t even afford a little unexpected emergency expense? Most of the time, debt is the problem. Their income finances debt payments, such as car payments, car rentals, student loans, credit cards, personal loans, home equity loans, and all other loans. The rest goes to monthly essentials like bills or groceries, leaving little room. They have no margin, or extra, in their monthly budgets. The lesson here is “it’s not what you earn, it’s what you keep,” and what you keep can be used to pay off debt, save money for specific purposes, or invest. Having headroom is a good thing.
On a related note, being generous to those in need requires having the capital to do so in the first place. This is another great reason why having a budget plan, living on less than what you earn, and avoiding debt are great goals to pursue, as they allow you to make a difference in the lives of others while at the same time. putting food on the table and investing in your future and that of your family. If we are constantly broke, how can we provide meaningful help to others?
Now on mortgage debt: Dave Ramsey and the Financial Peace School of Thought would say that buying a home is the only type of debt that shouldn’t be avoided, and I agree. While paying in cash is the obvious best choice when buying a home, housing costs vary widely depending on where you live in this country, and there is a distinct difference between saving up to paying in cash for a $ 6,000 car versus a $ 300,000 house.
If you need to take out a home loan, the preferred method would be a 15-year fixed rate mortgage with a payment of no more than 25% of your take home pay each month. This allows you to pay off your home faster than a 30-year mortgage, saving you huge amounts of interest. The folks at Ramsey Solutions calculated a few numbers: for a $ 200,000 home (terms: 20% down payment, 5% interest, and 4.5% interest respectively), a 30-year mortgage would cost 386,000. $ in total, and a 15-year mortgage would cost $ 275,000 in total. So in summary, the privilege of financing your house payments over 30 years instead of 15 years will cost you $ 111,000 in additional interest charges!
Of course, you should always avoid buying more homes than you can actually afford, however tempting the idea might be. This behavior was one of the main causes of the Great Recession of 2008. Lenders have since tightened standards for borrowers, and according to Rocket Mortgage, lenders generally like to see a debt-to-income ratio (your debt divided by your income). ) by 50%. or less. Trying to buy a home when debt payments and bills consume half of your income each month is a very precarious place, and when you factor in other costs like maintenance, repairs and contingencies , owning a home in these conditions would be stressful indeed.
Many of us don’t want to admit the difference between “wants” and “needs”. We want it all, and we want it now: a house, a new ‘safer’ and bigger car for the kids or grandchildren, an expensive apartment with no roommates, vacations in Europe with our friends (pre-COVID, de anyway), a new mattress, the iPhone 12. It’s possible to cash things like these, but it’s faster to go into debt to get them, and instant gratification attracts many people.
None of the things above are things you really need, although there is nothing inherently wrong with them. In fact, when you go into debt, you are withdrawing income to pay for real needs, which may deprive you of the opportunity to achieve those “wants” in the future. Early in our marriage, my wife and I decided we wanted to own what we had, and we weren’t going to fund our way of life with payments – not even iPhone payments on the cell phone plan. We would own everything, or we wouldn’t buy it at all.
Actions you can take today, right now: if you are in debt, make a plan (like Dave Ramsey’s Seven Baby Steps) on your own or with the help of a financial coach to use the margin of your budget to pay it off as quickly as possible. This will likely mean temporarily delaying some gratification. Be careful when investing in things that lose value, even with money, but especially through debt. Taking advantage of yourself leads to trouble. Instead, invest primarily in assets or things that have value or that are increasing in value, rather than going into debt or investing in things that are losing value.
In Robert Kiyosaki’s book, “Rich Dad, Poor Dad,” he asks: Is your home your greatest asset or your biggest handicap? For my wife and I, this is our biggest liability, and we aim to pay it off sooner to be completely debt free, then that will be our biggest asset. This philosophy has changed the way we live and operate. When you have no payments, you have extraordinary flexibility and freedom. You can write it down and underline it!
Luke Miller is passionate about helping others succeed in their finances, their careers and their lives. A fourth-generation aviator, he is a pilot for a major airline based in Seattle. Luke and his wife live locally in Enumclaw. This article is based solely on the opinions and recommendations of the author and is not intended to be a source of investment advice.