FIVE REASONS WHY DEBT IS DUMB!
HOPE Session #1 - WHY DEBT IS DUMB DISCUSSION
A common saying is “DEBT IS DUMB, CASH IS KING”. We are going to go through the reasons why DEBT IS DUMB, and all the ways it hampers your life…in the present, but even moreso for the future. I will also speak to the concept of “Good Debt vs Bad Debt” at the end and give you my perspective.
1) YOUR WAGES GO TO SOMEONE ELSE!
2) THE TRUE COST OF A PURCHASE IS MUCH LARGER THAN YOU THINK!
3) IT CHOKES OUT YOUR FUTURE
4) YOU ARE SLAVE TO THE LENDER
5) YOUR TRUE SPENDING HABITS ARE MASKED
YOUR WAGES GO TO SOMEONE ELSE
Let’s face it, we all WORK HARD FOR OUR MONEY! Why would we ever work a full day, only to give our wages to someone else? That is what is happening when you pay interest on an expense…the earnings you make are automatically going to someone else, simply because you made a purchase before you had the cash to do so. Getting a little blunter, but still very real, interest is voluntary taxation. Let’s do a quick comparison so you understand what I am getting at:
- Taxation – Mandatory amounts you have to pay to someone else (typically the government) based on your earnings
- Interest – Amounts you HAVE to pay to someone else based on an amount you borrowed.
When you sign up for a loan (credit card, car loan, or other), you are creating a CONTRACT to pay the lender an amount on top of what they loaned you so that you can use their money now. This is a voluntary choice you make (taxes are not). So essentially, your choice to buy something NOW is costing you additional interest (wages), and you are choosing to do so VOLUNTARILY! VOLUNTARY TAXATION!
THE TRUE COST OF A PURCHASE IS HIDDEN
This point applies mostly to credit card loans and purchases, but could be true of any loan if you aren’t paying attention. To demonstrate this point, we will look at the interest incurred if a credit card holder makes a $1,000 purchase, and it takes them 12 months to pay the amount off. At an indicative credit card interest rate of 22%, this would amount to $220 in interest over the year (assuming the full amount is paid off at the end of the year). That $1,000 purchase you made on January 1, will have cost you $1,220 by the end of the year – yikes! Even with inflation going as it is now, we are only seeing high single digit rates – you are costing yourself over 2.5 times inflation by “buying early”. NO THANK YOU! I’ll take a 20% reduction in price any day! OF NOTE: many vendors will offer “financing” terms/payments – you really have to dig in on these and look at the terms. Even a “0%” interest agreement likely has a financing charge/account fee, or some other cost…essentially “building in” the interest to the payments or as an upfront charge. Remember TANSTAAFL!! (THERE AINT NO SUCH THING AS A FREE LUNCH!!)
DEBT CHOKES OUT YOUR FUTURE
When your wages are going to someone else, and not to your own “coffers”, you are missing out on an opportunity (whether its to save for the future, or even an experience like dining out). By ensuring you don’t have to give your hard earned money to someone else, you will maximize every dollar of your income and put it towards your future…not someone else’s. When you have debt, you have minimum payments (and hint hint: they are designed to make you pay back over a long time period to maximize the interest of the lender!) – as you are forced to make minimum payments, it continues to hurt you and restrict your cash flow, limiting savings opportunities for the future. This can become substantial over time! If you make a $650 monthly payment on a car loan, at 7.5% interest, from age 25 to 65, this adds up to almost $2M! That is enough to retire on! My challenge to you is this: Create a game – see how little you can pay to other people and see where it gets you! You won’t regret it, and with the right mindset, it will just become second nature for you.
YOU ARE SLAVE TO THE LENDER
This may sound dramatic, or like hyperbole, but in reality it’s the flat out truth. Proverbs 22:7 states: “the rich rule over the poor, and the borrower is slave to the lender”. SLAVE you say? Sounds harsh, but true. When you sign up and are in-debt, you MUST make those payments – if you do not, you are at risk of losing your purchased. Default on mortgage payments – foreclosure; default on car payments – repossession; default on credit card payments – bankruptcy. In reality, many times there are clauses and covenants in the loan documents that you have to abide by as well…yikes! If you don’t follow those covenants, or even if you do, the lender can call the debt…if you can’t pay – default. The reality is that they don’t want to call the amount, as they want to keep collecting the interest from you…but they have that right. GET DEBT OUT OF YOUR LIFE. BE YOUR OWN BOSS!
YOUR TRUE SPENDING HABITS ARE MASKED
When you run up debt, you are delaying payments on what you are purchasing now. This gives you a false sense of safety or security. I am not against credit cards, but you have to be sure that whatever payments you put on a credit card you are able to pay off. If you don’t have the cash to make the payment on the credit card, you are just buying something now that you cannot afford. In full transparency, I do use credit cards, and am ok if clients use them as well, but you have to be disciplined enough to save and ensure that you don’t carry a balance. There is evidence that when you spend money through cash or debit, there is an emotional response to the cash leaving your possession. We naturally resist this response so we spend less than if we use credit (where we delay the feeling of this response). That being said, I do recognize the convenience, and functionality of credit cards – and while rewards points are a nice perk as well…I would never consider them to be a reason to use credit cards. You have to remain disciplined, and if you feel or know that you are vulnerable to over-spending, I would strongly suggest you not use credit cards until you get your habits under control.
So remember: DEBT IS DUMB. Save up front and purchase only when you can afford to. By minimizing your interest payments, you will create additional cash flow and be able to use that cash flow to either pay off debt (if you are in debt), or, save for your future. You will be your own boss and won’t have anyone looking in on you! You’ll be glad you did!
BONUS: Good Debt vs Bad Debt
Based on the above list of how debt impacts your life, let me ask you - is there such a thing as good debt? In my opinion…NO! There is necessary debt (eg) buying your first home), and unnecessary debt (consumer debt where you make “wants” into “needs” and buy too soon). Typically, “good debt” is classified as debts where they have enabled an asset to be purchased, or greater growth in a business to be realized (leverage is the technical term for the use of this debt). In my view, the question is whether you actually need to buy that asset with debt, or if you can save ahead and then purchase - avoiding ALL interest costs. Remember, my game is to see how little interest I can pay to others. In my view, purchasing a house, or perhaps your first car so you can start to work and create income (barring any other transportation option), are the “necessary” debts. Any other debt is unnecessary. And in any case, when you undertake debt, you have to be sure you are in a financial position to carry it…because if you default, its likely you will go bankrupt, and then lose everything. Remember: DEBT IS DUMB. CASH IS KING. Those with cash have the most options in any negotiation, those with the most options - WIN!
Interested in learning more? Want to chat or have questions? Come to my bi-monthly Q&A session – second and fourth Thursday’s of each month – 7:30pm EST.
Until next time, remember:
EDUCATE. MOTIVATE. INNOVATE.
IN YOUR CORNER.
