If the concept of this post sounds simple, it’s because it is… but that doesn’t mean anyone adheres to it. In a world where credit is readily available and normalized, maintaining any standard of debt aversion is totally weird. But it’s really the answer to avoiding financial headaches.
There’s a lot of discussion over what constitutes “good” and “bad” debt.
In my opinion, all debt is bad. But leverage is good.
Leverage is still debt, but it’s debt that is used in such a way to generate more money. I’m of the mind that it’s ok to go into debt for things that will make you money, assuming you manage that debt properly. This would include things like student loans, as more education typically correlates to higher earning potential, or a mortgage, as homes have historically increased in value.
It does not include things like cars, computers, clothes (though I LOL at every sincere advocate of the dress-for-success mantra that justifies a luxurious work wardrobe), pets, or weddings. Most things you purchase end up costing you more money in maintenance or accessories, such that you would have been better off not buying them in the first place.
This doesn’t mean you should never buy stuff, it just means you should never buy stuff with credit.
Getting out of the mindset of financing your life isn’t easy. Many of the things we want are very expensive, and funding them with debt is the norm. Opting to buy things in full rather than signing up for affordable monthly payment, means saying no to something you might really, really want.
I’ve said before that invisible wealth is more important than visible debt, but I’ve needed to remind myself of my own rules lately. A month into my new full-time job, I’m already feeling the itch to spend. But then I came to my senses and realized:
It’s dangerous to pledge your future income to a present purchase.
But I have friends that have gone into debt for their weddings, and nearly everyone I know has a car loan. I think most of us don’t want to admit how little we can really afford.
I’m happy I got off the consumer credit bandwagon in my early twenties, even if staying off the hedonistic, materialistic merry-go-ground isn’t easy now. Sometimes a bigger income just feels like you can afford bigger monthly payments, and you have to talk yourself out of your own eagerness to be an idiot (or at least I do).
I’m sticking to keeping credit out of my life, except in cases when it can be used as leverage to earn me more money.
Perfect!! Couldn’t agree more. Poorly managed debt on consumer items is the devil’s work! However, it doesn’t mean that debt is the devil’s work.
Debt is a chainsaw. Used properly, it can help you reach your goal of cutting down the hedge much quicker than using your hands!
However, used badly….
Leverage is one of the key factors that makes real estate investing so profitable in the long-term and, when used properly, should be in most people’s portfolios.
Dave Ramsey, for instance, suggests that you should never, ever have any debt at any time because of the risk. He always uses the example of whether you would borrow $50m at 5% to get a return of 6%?
However, the real question (especially with smart real estate) is probably more akin to: would you borrow at 3-4% to get a return of 20-30%? Yes. Yes I would!!
I would too. Likewise borrowing for school at 0%-5% to get a return on your lifetime earnings. Or borrowing to invest (ie. margin account for stocks) — though your really have to know what you’re doing.
Well said, Bridget! My only debt is my mortgage and I consider my home purchase an excellent investment. I can’t image taking on a car loan ever again! Best of luck navigating the expenses for your wedding. I know how ridiculous some vendors can be!
Such a good post!
I’ve written before about why I consider my student loan good debt – as much as I hate that term – because it’s put me in a position where a) I’m much happier doing the work that I am doing and b) I am more gainfully employed. I consider the money ($28,000 in loans paid off in just under two years) to have been a great investment in my future.
I can’t imagine going into debt for a wedding – or spending extravagantly on one – especially considering your point that one would be spending their future income. I think my debt-aversion is so high now that I’ve been in such massive debt once.
I’m not sure I could ever own a car. Rob Carrick once referred to it as a “money pit on wheel.” It just makes my stomach turn knowing it loses a lot of its value the second you drive it all the lot.
I have days where I just laugh out loud when somebody I care about thinks it’s worth going into debt to buy a new big screen TV or living room furniture, but no matter how much I try to stop them, I know I have to let them make those mistakes and they’ll figure things out on their own.
I heartily agree! Consumer debt is such a bad assumption in our society. I’m a bit mystified about how it became so normal and tolerated. It is just nuts to pay 20% interest on consumer goods that may be gone before you even own them.
AMEN. That’s the worst part: that you probably consume them before you pay for them. It’s nutso.