Turn away now if you’re easily offended by shocking, profane language. I mean, really. The subject of this post is a vile, awful thing. I’m talking about the “D” word: Debt.
Yes, yes I know. The “debt is a bad word” joke has been done over and over again, but we really are too cozy with the idea of debt in America. According to the Federal Reserve, we owed almost 3.6 trillion dollars as of April of this year. Not the government, we did. With some rough estimates on our population, that works out to over $11,000 owed by every single person living here. Not per family, per person! It’s like this:
But wait. Isn’t debt a tool? Can’t you manage debt responsibly to build wealth faster? I suppose the answer could be yes, if you’re willing to devote your life to managing your money obsessively, to never making a mistake, and to living with large amounts of risk. For the rest of us, debt should be a bad word. Just to be snarky, I Googled “is debt bad,” and the first site that came up was debt.org. Not a site I’d ever heard of, but the result listed was titled Good Debt vs. Bad Debt. I won’t even link to it here, because it’s not very good. The first sentence after the intro was, “In general, good debt is that which increases your net worth and/or helps you to generate value.” Let’s examine that for a second. Good debt…increases your net worth. That’s… not possible. Even you if you buy a $300k house with a mortgage, your net gain is still negative. You now have the $300k asset, the house, but you also owe $300,000, plus interest! Just because you now have the asset doesn’t mean the liability gets to go hide on the back page of the balance sheet! Maybe the author was trying to stealthily admit that there’s no such thing as a “good debt,” since debt by definition reduces your net worth. The only way to increase your net worth is to get rid of your debt. Sometimes, debt might be necessary (like when purchasing a house), but it is never good. Here’s why:
1. Debt robs you of control over your money
This one’s pretty obvious, but it shouldn’t be overlooked. If you owe money to someone, they have the right to your money. If someone else has the right to your money, you don’t get to choose how it’s put to use. You don’t have the freedom to save for retirement if your paycheck goes right back out to credit card companies as soon as it hits your bank account. You don’t get to sponsor a family for Christmas if that money is going to the payday loan office. The only way you get complete control over where your money goes is if no one else stops by your bank account every other Friday and takes what they want. When you don’t have debt, your money can go where you want it to go, not where you need it to go. The bible reinforces this concept in the verse that Dave Ramsey loves to quote so often, “The rich rules over the poor, and the borrower is the slave of the lender.” (Proverbs 22:7, ESV)
2. Debt brings risk into your life
Unless you’re perfectly in control of your life, debt inherently involves risk. If you have a mortgage, there’s always a chance that the bank could take your house. If you miss a payment or two on your car, you could lose the car. Again, it’s not exactly rocket surgery, but risk is important when evaluating the effect new debt will have on your situation. I have heard Dave address several people who ask about taking out a mortgage to invest, and he always counters with a question: “Would you take out a million-dollar mortgage in order to invest?” They (almost) always answer “no” right away, because no one wants to be on the hook for $1,000,000 if something goes wrong. Why is it different for $100,000, or even $10,000? If you don’t have the money to pay for something in full at the time you purchase it, you’re taking on risk that something will happen that affects your ability to pay it off. You’re also taking on the risk that comes with more complex finances. More debts equals more bills, which equals more due dates, which equals more chance for something to be missed. Even if you are perfectly capable of handling your bills from a financial standpoint, human error has a nasty way of sneaking in at the worst times, causing you to miss a due date, overspend in one category causing a shortfall in another, or even forget a payment altogether.
3. Debt (sometimes) reflects greed
As I said right after my unequivocally hilarious Oprah meme, sometimes debt is necessary. R and I will, God willing, be in the market for a house in the next few years. Unless something drastic happens between now and then, I don’t think we’ll have an extra $200,000 laying around that we’ll be able to use. Because of that, and because we’re viewing our future home as a home and not an investment, we’ll need to take out a mortgage. Just about everything else in our current debt portfolio, however, is reflective of our irresponsibility in one way or another. My credit card is loaded with things I just had to have. I don’t even remember what they are now, and I’m sure I’ve thrown out or donated at least some of them, but I’m still paying for them. If I had just bought them with cash (or not at all, a lot of it was junk, I’m sure), I wouldn’t be paying almost 20% extra on all of them. My student loans are the result of the path I “had” to take in order to get ahead at my company. Instead of saving up and paying for school, and developing myself in other ways in the meantime, I took out loans because that’s what you do, right? I’m now paying back those loans for a degree I didn’t finish and a company I’m no longer with. Our debt can mostly be summed up by saying, “I know I can’t afford <insert thing here> at this time, but I want it anyway, and I want it now.” Part of our decision to get out of debt was the realization that we weren’t relying on God to supply our needs, we were relying on Discover, Visa, and American Express.
4. Debt creates inflexibility
When you take on debt, you’re making a commitment. Let’s use the example of a car. You’re 23, fresh out of college (maybe you took a victory lap that senior year), and you’ve just landed an awesome job making $65k. You celebrate by going out and buying a brand-new Mercedes coupe at a great interest rate. Ahh, the smell of German engineering, right? But wait, now your wife has some great news of her own: she’s pregnant with your first son! Are you going to try and figure out how to cram little Hugo into that two-door death trap, or are you going to suck it up and roll your newfound negative equity into an unnecessarily expensive dad van? If you pay cash for things, you have the freedom to sell them whenever you want without having to worry about how much you still owe or figuring out if “the math” works. Don’t want it anymore? Sell it! Another opportunity comes up that requires a change? Change it! That’s the math of purchases that are paid in full.
I know some of you that read this aren’t going to agree with me, and you’re going to shake your heads and chuckle at my simple ways. But I wholeheartedly believe that there is no such thing as good debt. There may be good reasons to take on debt, but if you can accomplish the same goals without going into debt, I don’t know anyone that would do so. That should tell you something.