Debt stress is the dangerous lurker in your head that’s distracting you in your day to day life. Consumer debt reached an all time high of $14.3T in the first three months of 2020. To put it mildly, that’s a lot of stress! There’s no doubt the global pandemic led to consumers needing to tack on more debt. After all, people need to put food on the table somehow if they’ve lost their jobs.
Taking on debt to pay off stuff that isn’t making you more money is nonsensical. Using other people’s money to finance your indulges mean that you can’t afford it. It means you need someone else’s help to obtain it. This should be avoided at all costs and you should make it a rule.
However, there are exceptions as well. Taking on mortgage debt to purchase a home is completely fine. Debt used to finance a vehicle is completely fine as well. Rates on vehicles is one of the lowest rates you can get, after all.
Credit card debt is completely fine as well as long as you pay off every month and don’t carry a balance. In fact, it is one of the most wonderful machines you can use to build wealth. I currently have five credit cards and plan on having additional ones if I see the right opportunity.
However, in my personal budget, I carry zero debt. My credit cards are all paid off every month and my car was paid with cash. In other words, I am living a debt stress free life, baby. If I want to splurge, I have no guilt and I will splurge away. If the right investment opportunity comes along the way, I can pounce on it. It’s the life.
Debt Stress Doesn’t Just Affect You Yesterday and Today, But Tomorrow Too
Everyone should be aware of the time value of money. It’s a fancy sounding finance concept that just means a dollar today is worth more than a dollar tomorrow. One million dollars could buy more goods 50 years ago than it can today. Therefore, today is the most important day of your life so far. Until tomorrow comes, anyway.
However, in the context of personal finance, there are countless ways to make a dollar today worth far more tomorrow. It is through investing that you can grow a dollar today into approximately $30 after 40 years of investing. The great news is that $30 in the future will buy more stuff than that dollar today.
In the debt paying-off process, you are using today’s dollars to pay off yesterday’s expenses. To generate dollars today, you needed to have spent time. You don’t just lose money today you lose the time that it took you to pay off the past debt. Meaning, there is opportunity cost.
Not only are you losing the dollar today to pay off your debt, you are losing the future $30 that it would have been worth. Furthermore, on top of present and future money lost, you lose time. People think when they take on debt, money is all they lose. That’s far from the truth.
Debt is the Scariest Thing Ever
Debt is a burden, it means that you have to use today dollars just to break even. Not to grow and to make progress towards the promised land, but to break even. Doesn’t that sound awful to anyone? The shackles of debt doesn’t just keep you in the exact same place as when you started. It rather keeps you back and you work on moving forward to end up in square one.
Just to get you to the exact same financial situation as a newborn baby who has made zero financial choices. Debt means you are better off being born again rather than having had made the choices you’ve already made in your life.
Not to mention, the psychologically damaging aspects of having debt stress in your day to day life. That psychological damage isn’t in monetary terms but in qualitative terms. It slowly eats away at you and takes away your sanity, inch by inch. You are not in control if that happens.
Once a small snowball rolls from the top of the snow mountain, it is almost impossible to stop it. The best way to stop the snowball from becoming a gigantic one is to get rid of the snowball before it starts rolling.
Money Generating Debt is the Best Debt
Hopefully, I have done a good job discouraging you from taking on personal debt just to spend money on meaningless things. It is scary to dig yourself into a hole only to dig more as time passes.
However, not all is lost. Not every debt is bad debt. There are some types of debt out there that actually help you make more money. That kind is the best kind there is in the history of the world.
Not only does it help build your credit, it works for you in generating more money. It’s like a self cleaning oven where instead of increasing your debt stress, it helps you decrease it.
Student loans, mortgage loans to purchase rental properties, margin debt, and more helps you amplify your returns. However, be brutally honest with yourself. Ask yourself if the debt is actually helping you bring in more dough. Don’t let pride get in the way of answering that question honestly.
If in reality, it has the opposite effect year over year, abort ship and pay off everything. It is reserved for people who know what they are doing to grow their assets. To get your finances off the ground, I recommend going through it without external funding sources. Some of the interest rates that I see are downright pure predatory.
Not taking on debt is the right and simple step to take towards getting your finances in order. Taking on debt and leveraging yourself can be the right step as well but it is complicated. When given a choice, why not make simple right choices instead of complex right choices?
