“The people that most often trumpet the advantages of debt are those who behaviorally are least likely to ever escape it.” – Paul Kindzia
There are a lot of reasons that people provide to others (or to themselves) why they have DEBT. A few examples would include the following;
There are a lot of reasons that people provide to others (or to themselves) why they have debt. A few examples would include the following;
- The interest rate is so low it just makes sense!
- It is zero percent interest for a period of time and when that time elapses, I can transfer the debt to another zero percent offer.
- I get a tax deduction on my Schedule A – Itemized Deductions for my mortgage interest.
- If I borrow low and invest high, I can keep the difference. That is smart money management.
- It’s only temporary. I plan on paying it off once (list off a few dream situations that are not likely to happen based on prior history with the individual).
Here is the “A #1” top reason that people have debt. Are you ready for it? THEY CAN’T CONTROL THEIR SPENDING!
That’s it. That’s what it boils down to.
That’s not to say that all debt is evil. Some student loans may be necessary or prudent (I said some. I didn’t say so much in student loans that you will be broke for the first 2 decades after college graduation). Buying a home with a mortgage may be a very prudent thing so long as the debt levels are appropriate and the cost of the home is appropriate.
When you buy something today using debt, you are purchasing goods and services today for money that you haven’t earned yet. The future money that you earn (if you actually end up earning it) has to be enough to not only pay the debt back, but also the interest. Buying things using debt will always cost more than buying things and paying for them outright.
It’s also enjoyable to hear people explain the “tax advantages of debt” to a CPA as in, “I get a tax deduction on the interest expense. Isn’t that wonderful?” Let’s see, you bought a home that is far too expensive. You funded that purchase with 30 year debt. For every dollar of interest that you pay to the bank, you get to deduct that $1 on your Schedule A. Your effective tax rate is 30% which means you saved 30 cents in taxes by spending $1 on interest expenses. Imagine using that strategy on massive amounts of money. Pay the bank $1 million in interest charges to save $300,000 on your tax returns. Eventually you will go broke chasing the tax deductions from a cash flow perspective.
Borrowing low and investing high actually can be a sound business strategy. But borrowing money is creating leverage and we know leverage works both ways. It can either magnify the gains or it can magnify the losses. So borrowing money from home mortgages to invest is nothing more than leveraging your investments while using your primary residence as collateral. At a high enough level, you get the wonderful opportunity to lose your shirt and your house all in one round trip! And it happens.
Paying off debt creates financial freedom. It takes a lot of work and it takes a lot of patience and discipline. But it does relieve you of a large monthly burden. I want you to imagine not having a mortgage. I want you to imagine no longer having that monthly payment to make. How would that make you feel knowing that YOU own your house (not your bank)? How would it make you feel to know that all you had to do from that moment on is pay the annual taxes and insurance and nobody can evict you?
When you have no debt and you have large financial resources (like investments and cash) you have wonderful credit. I encourage you all to pay off your debt to experience what that feels like first hand. What would it feel like to own your cars, own your boats, own your house, own all of your possession and not owe anybody anything?
Think of it this way. If you paid off your house and you have wonderful credit, you can always change your mind and go back and re-borrow money again. There would be a line of mortgage bankers ready to make a deal with you and loan you the money. But once people get debt free, how many people end up saying to themselves, “Gosh, I really miss making that monthly debt payment. I need to borrow that money again…” or, “This is a huge problem. Money comes in every month but I don’t have large expenses anymore. The money just keeps building up and I can’t stop it. I really need those debt payments to reduce my cash flow.”
It doesn’t happen. When people get debt free they tend to stay debt free. Why? Because it was better. The hard part is getting debt free and most people will never really get to feel what is like in both situations because they never ever end up debt free. So all they know is a life of debt and they justify it with a bunch of reasons (including those stated above). People that have debt and have never escaped it can’t understand how good it feels to be debt free. The only thing they could do is keep spending money that they haven’t earned yet and justify why that makes sense which only serves to continuously trap themselves into a cycle where they have to keep working to make money to pay for things that they bought yesterday plus interest.
You can become debt free and make substantial progress over time if you put your mind to it. It can be done. You have to decide for yourselves. What’s the worst thing that could happen? You pay off all of your debts to then decide that you miss those monthly payments. Fat chance of that happening.
The real downside is that when you become debt free you can’t even brag about it to your neighbors because you know that they haven’t done it themselves and thus would be bitter towards you and perhaps throw rotten apples at you. You can’t walk out in your neighborhood cul-de-sac and scream, “I’m debt free suckers!” I doubt you would get a warm response even though those around you would love to be in that position but just lack the discipline and the planning to get there themselves.
Dump the debt and feel the freedom. Do you own your possessions or do they own you?