Imagine a Life without Debt
Have you ever stopped to calculate how much you pay in interest every month? If you are like most American families, it’s probably at least a $1,000 per month and it could be a lot more. Between the mortgage, car payment, credit cards and student loans, it’s usually a lot of money. We have all been conditioned to think it’s OK to pay all of this interest. Because of the mortgage tax deduction, student loan deferment and other incentives, Americans are becoming more and more indebted.
The Debt Trap
This huge quagmire of American debt is no accident. The banks and other interested parties have lobbied hard for these tax incentives and they protect them ferociously, whenever they are threatened by budget cuts. They have taught us to believe this is “good debt”, because of these incentives.
Our debt represents a bank’s future income and it pays them generously every month. That’s why our loan is an asset on their balance sheet. Banks would like every American to remain in debt forever. We are the geese that lay their golden eggs.
This relationship is great for banks, but it is terrible for consumers. We must work much harder to afford the basic necessities, such as an education and transportation. Debt puts us at a much higher risk of foreclosure and bankruptcy. It increases the amount of stress in our lives, affects our sleep and contributes to divorce.
Life without Debt
Forget the whole good debt vs. bad debt debate for a moment and just think about what you could do with that $1,000 every month. If you invested it, instead of giving it to the bank, you could become a multi-millionaire, in a working lifetime. In fact, if you invested just half of what you probably pay in interest, you could become a millionaire. You could take more vacations or save more income for your future.
Think of how your life would be if you had no car payments, no credit cards and no student loans. It probably seems impossible to live like this and yet many people do. They haven’t bought into the debt-treadmill lifestyle and they are doing just fine. Forty years ago, people rarely had any debts beyond their mortgage. They did just fine living on a cash basis. In fact, they lived on a single income and still saved a lot more than we do today.
I remember my folks buying a new car for cash in 1975 and many others in my neighborhood did the same. They saved up for a couple of years and bought the car they wanted. My Mom, my brothers, my sister and myself all worked our way through college and paid as we went. We all have degrees and graduated without any student loans. It wasn’t easy, but it was definitely worth it. It’s possible to reduce or eliminate the debt burden you carry. It just takes a different way of thinking. It takes patience and commitment.
My Debt Free Dream
For all the things I have done right in my financial life, there are a couple of things that I have done wrong. One of the worst was to ring up a credit card balance when I was young and let it hang around. I now think about all of the things I could have done with the money I threw away on interest and it makes me sad. I could be years ahead in my goal to become financially independent. Instead, I sacrificed my precious income to Citibank.
Last year, I decided to change my life and I got serious about eliminating debt. At the rate I am paying, my credit card balance will be gone in a little over a year. And, my mortgage balance will be paid off in about six years. Then, I will start to live my debt free dream. I will have the flexibility to choose what I do for a living. I will have the freedom to travel and share new experiences. I will have the capacity to help others who are less fortunate.
The Bottom Line
The bottom line is that consumer debt benefits others, at our expense. Debt is not prestigious; it’s not a convenience and it’s not an advantage. It’s a parasite on our finances and a threat to our independence. Only by understanding the true nature of debt and the agenda of those who covet our incomes, can we live in peace and prosperity.
“Interest on debts grow without rain.”
Yiddish Proverb
Recommended Reading
Tough Money Love – Consumers Drop the F-Bomb on Government Economists
Watson Inc. – The Educated Indentured Servant
Invest it Wisely – What do you need to get out of the Rat Race?
This post was featured on the Carnival of Personal Finance over at Dough Roller. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the premiere carnival for Finance Blogs.
I never understood why there’s a debate in the first place. A debt isn’t “good” just because the interest rate is low. Like you said, that’s pretty much just a marketing campaign by the folks who are making money from us.
You don’t need a $200,000 house to be happy, especially if it results in most of your income going to the mortgage. There are plenty of properties out there within saving distance.
The reason there was a debate about “good debt” is because houses and college degrees used to have a pretty high ROI. So, if you could use someone else’s money to finance an appreciating asset, it usually turned into a good situation.
Now, with housing dropping 40% and college graduates unable to find jobs, these transactions have started to to look more like “bad debt”.
In either case, the less debt you accumulate buying a house and attending college, the better your financial life will be.
there are only two occasions i’ve seen where debt was a good thing.
1)In Russia sometime in the 90s, with sometimes tripe digit inflation, and low interest rates available at the same time, there were tons of businesses that borrowed tons of money and repaid it shortly after with money that was meaningless. Basically borrowing 10 million rubles when a loaf of bread was 1r and repaying the 10 million when a loaf of bread was 10 million. There was of course a loser in this equation, the bank.
2)When 0% apr cards with no fees on balance transfers were big, I know a few people that borrowed at 0% apr up to their credit limit, threw it in a cd or an orange account at about 3% apy, and came out 3% ahead on someone else’s money.
Now the banks have caught on and are charging a 3% transfer fee making this exercise pointless.
I have heard people are doing that in Japan right now. Since the interest rates have been close to zero for a long time, traders are borrowing money for free and converting it into other currencies to make a profit.
This will probably start to happen to us in the U.S., if we keep lowering our interest rates. And, it will further depress the dollar.
Our government economists are really clueless. The zero interest rate strategy didn’t help Japan’s economy and it won’t work for us either.
Word of warning to those considering this, forex is a zero-sum game. in order for you to make some money, someone has to lose some money. so it’s either a) a bad idea (if you lose money) or b) selfish (if you win)
if you are cool with both, then forex definitely has a high risk and high return.
Thanks for the disclaimer on FOREX trading.
I did say “people” in Japan and what I should have said was “professional traders”. If there was easy money in FOREX trading, they probably wouldn’t have informercials on TV.
Debt is really about the economic rate of return. If you can earn a better return on the debt than what it costs, it is good. Otherwise, it is not.
Since consumer debt is to consume, then by definition all consumer debt is a cost and is impoverishing your future somewhat in order to improve the present. Mortgages fall less on the bad side since there is a return, but other than bubble times, the debt is still a net cost (and the bubble relied on finding a greater fool to take the debt off your hands).
I personally want to eliminate most of my debt down the road since it will help me achieve my goals of getting out of the rat race. That cannot be done with a large monthly payment, and I’ll feel like that hamster in the cage! Thanks for linking to my rat race post, by the way! 🙂
I’m always happy to link to great content and I enjoyed your Rat Race post.
I have been that hamster for a long time and I can finally see the cage opening. Almost everything I’m doing right now is geared towards leaving the Rat Race. I just have a short way to go.
This is why I am so deeply averse to debt. I just can’t get back into it, even if it’s for a house or whatever else.
Buying a house and taking on a huge mortgage is a pretty scary thing. Paying off the mortgage and owning the house is priceless. I am really looking forward to that day.
I love this post, Bret. My only debt obligation is a $600 mortgage each month. The best part about that is that, instead of allocating my precious income to the banks and other creditors, I am able to save a lot of money very quickly.
For example, this year I was able to save for both a nice vacation AND a kitchen remodel. I could have never been able to pull that off if I was buried in debt.
All the best,
Len
Len Penzo dot Com
My mortgage is down to $800 now, but I pay a lot more. They keep lowering the monthly payment to try and drag me out for 30 years. I’m not falling for it. I can’t wait to have it paid off.
I’m looking at a kitchen remodel too. But, it gets more expensive every time I look at it. We will probably end up doing a lot of it ourselves.
Hi Bret, I definitely agree with getting out of debt. My husband and I consolidated almost all our debt on one low interest credit card (4%). Since we don’t have a mortgage, we will be out of debt completely in about 6 months. It feels good to be on a track to a financially secure future!
No doubt Jennifer. I can’t wait to have it paid off. Then, I can enjoy more of my paycheck.
Bret, I love that I am reading this post now because I just wrote about this earlier today (for an upcoming guest post). I completely agree with your decision to become debt-free. It has had a dramatic impact on our ability to invest and overall peace. Kudos to you for making this commitment!
Shawn, I will have to check out your post. Where are you guest posting?
Well stated. No debt is good for me.
Our family paid off all debt 17 months ago (house and everything). It was not all that hard, we just paid attention to where our money was going instead of wasting it. There is nothing that can compare to the freedom of living with no debt. I wish I could convince everyone to live this way. There is nothing we want that could cause us to go back in debt. Plus we have money now that we don’t send it to banks…so we don’t need to go into debt to get things we want/need. Plus we can help others who are in need (that is the best part 🙂
Lee,
This is awesome that you are completely debt free. That is my dream and I am slowly getting there. I can’t wait until I own my paycheck, instead of owing it.
I am a first generation Chinese Malaysian raised by parents who escaped the famine in China. I was taught to save right from my first pay check.
However to buy a house and a car, i need to borrow from the bank, and that how i and most others got into debt.
Luckily with family help i have been debt free for the last 15 years. I make sure i pay off my credit cards bill promptly every month. It is great to be debt free. Only thing is the temptation to borrow to make money as widely advertised.
Yousin,
Thanks for stopping by. I visited your blog and I enjoyed reading your posts.
I wish more Americans would teach their children to save from their very first paycheck. I did this for my children, but they are always distracted by wants.
I wish my parents had taught me this as well. I had to learn it on my own, after I became an adult. Saving is not as common here as it once was. As you said, there is a lot of marketing and easy credit, which keeps some people in debt their whole lives. But, many people are starting to catch on and the personal savings rate is going back up.