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My Personal Beliefs on Debt: Part 1

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Do you try to avoid debt at all costs or do you think it’s ok to take on some debt? If you do believe in taking on debt occasionally, what are the areas where you think debt is wise/acceptable? In this post, I’m going to lay my financial beliefs on the table and also do my best to express why I believe what I believe. Do you agree or disagree? Make sure to leave your comments below!

Is Debt Ever OK?

I wish I could say, “No”, but then I would be a hypocrite. Since I have started this website, I have actually taken on debt to purchase my very first house. Purchasing a house (or any livable property for that matter) can be quite costly, and therefore extremely difficult to save up for in one lump-sum. Therefore, I consider it acceptable to take out a loan for this reason. However, my wife and I are committed to paying off our house in 4 years (rather than the typical 30 years) for two reasons.

1) A home is very important; it keeps you safe from exterior predators, it protects you from harsh weather, and it provides your daily necessities to live life (running water, food preservation, temperature control, etc). With this being the case, I believe very strongly that the bank should have no ownership of my property. If my house is not fully paid for, the bank would have the right to take it away from me, even if I have paid back 99% of the loan. And, over the course of 30 years (the typical loan term), there most likely will be a down-time financially where the payments might be impossible to make. Rather than put myself in that situation, why not just pay off the debt as soon as possible to own my house free and clear? If there is a tough financial period down the road, at least I’ll have a solid roof over my head.

2) Save Money – If my wife and I chose to pay back our house loan over the course of 30 years, our $70,000 loan would actually cost us $150,000 because of the interest (and that’s with a low rate of 4%)! If we paid off our house in 15 years, it would cost us only $95,000. But, what if we were radical and actually accomplished our goal of paying off the house in only 4 years? We would pay a total amount of only $76,500.

What About Car Loans?

If you don’t have $2,500 in your account to purchase a used car, then you most certainly shouldn’t take out a $25,000 loan to buy a new one. Yes, cars are very handy to have, but I don’t believe that they are a necessity, and you certainly shouldn’t go into debt to buy one.

“But I need my car to get to work!” many of you might say. My response: Open up your mind. There are plenty of solutions to get to work other than getting a loan for a car. 1) Relocate – a few decades ago, people lived close enough to work that they could walk there. If you’re that close, then there’s no need for a car. 2) Sell some of your junk and buy a crappy (yet dependable) car. 3) Ride the bus. The list could really continue for a while, but you get the picture I’m sure…

What do I have against car loans? Cars are depreciating assets, which means they almost always go down in value. If you pay $25,000 for a car today, by the time you pay the interest, you’ll probably pay close to $30,000. Once it’s paid off (about 5-6 years later), your car is most likely worth only $10,000 (or less). Something about that just doesn’t seem smart to me. Yes, you might be able to get to work more easily, but you just lost $20,000 in order to do so. It’s best to save up your money and buy a car with cash.

I really planned to discuss all areas of debt in this article, but my thorough explanations (aka rants) have taken this article to quite a large word count already. We’ll have to continue this on Monday. What do you think about my beliefs so far?

…To be continued in Part 2 (on Monday): What about college loans? What about a loan for business?

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

26 Comments

  1. I have to say that I agree with your beliefs thus far. I wish I could say that I have lived up to them in the past. That is not the case, but today is the first day of the rest of my life. It is never too late to start.

    • Thanks for the comment CFM! We all have beliefs that we’d like to stick to, but it doesn’t always happen. All it takes is a course correction though!

  2. I do agree with you as well, our biggest regret has been financing two cars when we did not have any car loans before. That left us with $790 less to budget every month not to mention $450 annually in registration fees and gas for two gas guzzling SUV’s. We are wiser now and once the cars are paid off, will stick to cash all the way!

    • Ouch. I don’t know what I would do if I had 2 cars that were financed. That must be a huge chunk of your budget! Good for you though on the realization. Once those cars are paid for, you’ll love not having another loan payment.

  3. Your point about car loans is very good. I’d love to have a brand new car right now, but it’s just not in the budget. And my 99 Accord looks great, runs great, and costs me nothing. Took me a few weeks to find it, but I stuck to my criteria on model/price/mileage, and the price on this one dropped nearly $2,000 in a week so I jumped on it and got a great deal.

    • Good for you. You found a great deal and paid cash for it. Can’t do much better than that! 🙂

  4. You are like my husband and I. We have decided to pay down our house in hopefully 8 or so years. But it all depends on the financial situation. We are battling it.

    We have a car that’s dying, but I believe you should take care of your vehicle for as long as you can, unless it’s costing more to fix than to purchase another, and run it until it simply cannot run anymore.
    I don’t agree with trading in or as your say going into debt to purchase a brand new vehicle.
    We bought ours used but it was still quite a bit of money.

    I like your discussion.

    • Awesome! Good luck to you paying off your house! I bet you can do it in 8 years. I’m rooting for ya! 🙂

  5. I heartily agree. I purchased a used car for 1500. I will wait until I graduate until I buy a newer model, but still used.

    • Make sure that you don’t get sucked into the “I deserve a new car because I graduated” syndrome though. Many of my friends had that, and they can barely make their car payments now because jobs were tough to find.

  6. Derek, I know you keep repeating the no-debt thing, but it really should be a financial decision. Imagine you could get money for 0%. That’s free money. Why wouldn’t you take that? I know it’s not a realistic example, but if 0% is not believable, then maybe 1% is. That might make one want to pay with today’s dollars for some things, but it still is practically free money. Eventually there is a balance in what could be paid with debt and what could be paid with sweat (working dollars).

    In general, it’s ALWAYS best to use someone else’s money or pay tomorrow. The exception might be for consumption, which is I think the nuance that you’re getting at.

    • I have my Finance degree, and I have of course been taught this principle, and it looks great on paper, but there are many risks involved as well. Robert Kiyosaki teaches people to invest in real estate by using other people’s money (OPM) and earning a cashflow with it. However, he doesn’t often go into detail about the negative that could happen. The properties could have been making 8% more than what the loan cost, but with the down market, all of the sudden there are thousands of people with nearly a million dollars in debt, a negative cashflow, and no assets to show for it. I’d much rather use cash and reduce the risk tremendously.

  7. I mostly agree with your beliefs, but I did take out a loan to get a car – I want to have a farm some day, so I bought a truck and am paying for it now, but it will come in handy later!

    • It sounds like a good plan, but you probably could have more easily put money away each month in preparation for that truck purchase when you started your farm. You would have paid cash, plus you would have paid much less for your truck after it depreciated for a few years.

  8. I’ve always paid cash for my cars. My most expensive car cost $3,000. My least expensive car cost only $400 🙂

    • That’s awesome! Sounds like you understand how to live life. Congrats!

  9. Derek, I totally agree with you. Our minivan has $968 left on it. I am going to sell my G35, I do like that car but my business is 4 miles from my house I spend too much money on the car per mile per month than I should. I have vowed to never take another car loan, all cash is the way to go.

    • I’m glad to hear that David! Good luck paying off that minivan, and congrats on the realization about your G35! What do you plan on getting instead? Maybe a used Ford Taurus? They are cheap and quite reliable. 🙂

      • A used LandCruiser I have found one for $5k. I drive about 5-7k miles per year with that long commute I have but I want a four wheeler to take to the mountains. I will be exchanging $14k in debt for a $5k car that will be paid off.

  10. We are working hard to only pay cash for our cars from now on. We should have 4 of 5 years before we have to buy another car, we are saving now for that purchase. The bad part is that both our cars will probably have to be replaced around then… so fingers crossed, I hope we have enough.

    • At least you’re starting early! Kudos for that! If there’s not enough for two decent cars in 4-5 years, then one of you will just have to drive a beater. I bet you’ll have enough by that point though.

  11. I agree about the house loans but not so much about the car loans. I bought my 1st car 8 years ago, paid it off in 1 year and spent 7 years without a car payment. This was great because I could drop down to liability insurance and only had to pay for repairs. The unfortunate part, after 6 years of just paying minor maintenance costs my car started to crack. Finally after the head gasket and gas tank needed major repairs I decided it was time to get something new. The problem with buying really used cars is that repair costs add up fast. I decided on taking out a loan, and paying as much as I can off a month. I bought I nice used car for a decent price and am happy with it. If I pay it off as planned I will only pay $200 in interest, which isn’t terrible. As for the “taking the bus” suggestion, unless you live in a city, public transportation is pretty terrible (especially in the Midwest) The town I live in doesn’t even have a bus route. So it’s not always an option! So my personal best advice is to avoid car payments when possible, but be realistic about what your needs are.

    • I understand your point Casey, I really do. If your credit is good, you’ll basically pay nothing in interest on your loan. Viewing this factor by itself, you could really choose either option without much concern. However, remember what I said about the house loan? Your house is important and if it’s not 100% owned by you, then the bank has the right to take it from you. The same is true with your car loan. You might have paid off $20,000 on that car loan, but if you suddenly lose your job and can’t pay that loan anymore, bye bye car. This is actually the #1 reason why I pay cash for everything.

  12. Not having a car is really not an option in most parts of GA but I should have mine paid off within the year. Debt sucks but I’ve been learning discipline with it.

  13. Not having a car is really not an option in most parts of GA but I should have mine paid off within the year. Debt sucks but I’ve been learning discipline with it.


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