12 Oct Debt is Debt. Except When it Isn’t?
Debt is Debt no Matter How you Phrase It.
I love how there are so many different ideas about debt. Some people say debt is bad. Some people say debt is good. Some people say debt is a tool. Some say it’s bad but if you use it wisely it can be good. And then there’s the timeless “good debt vs. bad debt” theory.
Wow. Everywhere you turn there’s a different take on debt. I guess that’s the way of the world. As long as there are different people, there will be different opinions. The challenge for consumers is to sift through the different opinions and find the facts about debt.
Fact: debt costs you money.
I don’t think anyone can really dispute this. You can buy something today and not pay the full amount until later, but in the long run you will pay more than the original sale price.
Even with 0% interest loans, the debt is still costing you money. How? Well, with car loans the car loses value so you’re paying an effective interest rate equal to the rate of depreciation. And even if they didn’t depreciate, you’re still losing the opportunity cost to invest that money somewhere else.
If you have a no interest loan on something other than a car, it’s still costing you the opportunity to earn money by investing it for the long term. There is a cost to debt, no matter how you look at it.
Fact: debt costs you money.
Yes, I repeated the heading. It’s a reminder for those of us who want to argue how smart it is to borrow money to get a tax deduction. Here you’re paying interest on loans to save taxes on that interest. You’re justifying spending a dollar to save a quarter. How does that make sense? Yes, you’re effectively paying a lower rate on the debt, but you’re still paying interest. It’s still costing you money to borrow, regardless of the tax deduction.
Keep the mortgage to invest? Not this homeowner.
Some folks argue that you can borrow at historically low interest rates and invest the money. The theory is you’ll make more on the investments than you’re paying out. Well that sounds good on paper, but I’ve learned over the years that real life doesn’t always work out like it does on paper. There’s always something that comes up to mess with our best laid plans and theories.
I much prefer not having that mortgage payment anchoring me down and tying up my cash flow. I’ve got much more investment potential now that my mortgage is gone than I ever had before we paid it off. That’s cool in my book. Weird but cool.
I just hate debt. Period.
Maybe I’m ultra conservative, but I just don’t like debt. No matter how good it looks on paper or how fun it is to have something I want right away, it’s not as fun as being debt free. I don’t like the feeling of not completely owning my stuff. I don’t like the idea of always having to send some of my paycheck to someone else. I just like being debt free.
In my eyes, no matter how sophisticated you are with your debt, you’re still in debt. Debt is debt. Period.
What do you think?