Saturday, January 24, 2015

my philosophy on financial debt

For several years now (most of my life, actually), I have become exaggeratedly irritated with the idea that financial debt is or should be part of the average life. Cars, homes, flat screen TV's, wedding rings, even the wheels on our cars are financed these days. "No money down" and "just [insert an appealingly low number here] payments of $9.95!" are common phrases is advertising today. The idea that you should pay more money over several months that you would pay if you just bought something out right is disturbingly popular.

When did this thinking become the norm?

Undoubtedly, the idea of interest (or usury) has been around probably as long as currency itself. But unlike today, the thought used to be that only the desperate or destitute would resort to a payment method that made absolutely no mathematical--or common--sense. After all, a loaf of bread you can't afford today might have cost you one and a half times its actual worth if you expected someone to give it to you with the understanding that you would pay them later. Obviously, on a fool would do such a thing. Perhaps if you would have died before tomorrow without said bread, you could easily argue that your life is worth more than 50% of the cost of a loaf of bread.

But that's not the case today. No one will die without their TV being brought home today. No one's life is in danger of ending because they could not afford the pay-in-full price of a bedroom suite.

So why is so called "financing" all the rage today?

People are greedy, materialistic, and impatient. But this is true of almost every human being, and it has been the case since shortly after people showed up on this planet. But credit cards and loan notes haven't been around nearly that long. The problem is that culture (and subsequently people of that culture) have created and fostered an underlying belief that they can have what they want, when they want it. This is a very immature way of life. As parents, we teach our children that they can't always have what they want. But those same adults will turn around and go "buy" a $30,000 luxury car or truck that is more expensive than the $10,000 car they need for getting to and from work. Who's acting more childish?

This is also not only an internal problem. Like any other inner problem, it manifests itself on the outside of the individual. According a study done by, the average American lives in $15,950 of credit card debt. That's not including what they owe on their home, their car(s), student loan(s), or any medical payments. Is this really the way people want to live?

This is usually when phrases like "but I have to have a car," or "I have to have a house", or even "I have to buy  Christmas gifts for everyone" start to come out. Really? Is that what the sheeple are saying these days?

Let's take them one at a time...

A car probably isn't as necessary as one may think. What the debtor probably really means is that they have to have transportation. What they desire is comfort/luxury/social status. And they pay for it all...with interest. Here's some alternatives: Ride the bus. Chances are, your tax dollars are already paying for it, so why not save some money and let someone else chauffeur you around? Who cares is you have to share the ride with people you don't know? Try meeting someone new. Or catch up on those candies everyone's crazy about crushing. And this solution doesn't have to be permanent in your avoidance of debt. Here's a great link on how to drive debt-free and have a ton of money at the same time.

A home is a little less cut-and-dry. But the fact is, financing a home and owning it are totally different terms that people need to stop interchanging. When you finance a home, the bank owns the home and allows you to live there while they collect a steady monthly payment from you. They charge you interest for the convenience of living in the home until it's paid off. Personally, I believe that it's parents' job to provide food, shelter, and clothing for their children, so you'd think you can fend my argument off by saying that by financing a home, you're providing for your family. While that's partially true, it's far from the only method. Here's some tips for the dwelling-bound family: Rent a place within your means and save every month toward the home you want. It may take a while, but no one's going to undo all the years of prompt payments if you can't make your rent money this month. But if you miss your mortgage payments long enough, you'll be evicted all the same, except you'll lose everything you've paid for so far.

A man named Dave decided to get married one day and he and his wife both worked at $50k/year jobs at the time. Instead of living off the cumulative $100,000 they made each year, they rented a garage (a garage!) for the two of them to live in for four years while they disciplined themselves to live on only $50,000 a year, saving the other $50,000 each year. After four years, they had $200,000 in the bank and Dave said goodbye thank you to their landlord and wrote two checks: One for $150,000 to [actually] BUY a house, out right, in cash, and the other $50,000 he wrote in a check to his bride of four years and asked her to kindly furnish the home! This man went on to become a world-renowned financial adviser, business man, and millionaire. His name is Dave Ramsey and he has a website with tons of free tools to help anyone in any financial condition.

And here's a radical idea for singles: Try living at your parents' house! I know. Sounds radical. But if your parents are willing, you should be too. Seriously, swallow your pride, save your cash, and make your parents proud when you sign the first and final check to OWN your own home.

Now, after all this, Christmas presents seem kind of trivial, right? Exactly. Think of what matters. Trust me, your grandchildren won't remember you as the grandparent who didn't give them gifts for one or two years while you got your life in order. But they will remember you as the grandparent that gave them an inheritance of good financial discipline, instead of the grandparent that put their parents in debt for the next 30 years because Grandpa couldn't control his spending. And after all, isn't Christmas supposed to be about more than buying gifts?

Some quick math to hammer the nail in solid:

A $100,000 house will cost you $151,777.45 after 30 years of payments at 3% (which is a pretty good mortgage rate these days).
Alternatively, you could save $400 per month in a decent mutual fund at 11% and buy a $100,000 house in cash after only 20 years and have $6116 left over. Your choice: own a home in 20 years and have a $6116 in the bank, or own a home a decade later and have nothing extra in the bank.

Here's the point I'm trying to make: dump debt, discipline yourself, and stop doing stupid! Debt is the destination of fools, not the path of the free. Rest assured, you will sacrifice for the things you want. But you can chose to sacrifice a little now, or a lot later.

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