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?
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.