Is it me, or are there a ton of people out there right now that get really hot and heavy for this whole pay off debt fast thing? I mean, I’ve read so many posts about eating the free range crickets that live in your basement for cheap nourishment, or hooking your bike up to the power grid that my eyes are actually watering. Yes, I would rather have all my currents debts paid off than be in my current financial position… because then I could turn around and put myself in much better debt all over again! Now if you’re wondering what the heck I’m talking about I’m going to assume you haven’t read a few of the numerous posts (or books) on the difference between how wealth-builders and extreme-savers go about accumulating a nest egg.
Cricket – It’s What’s For Dinner
Extreme savers believe that everyone should pay off debt fast because it feels good. I’m fairly certain at this point that for many in the PF community it is actually an aphrodisiac. Hey I guess that’s all fine and good, but for me, money is just a tool, and consequently, money that I owe someone is just a tool as well. I believe that with a couple of caveats, it is much more productive for people to focus on building assets than it is to focus on paying off debt fast. I don’t want to earn a million by eating Ramen noodles and stacking coupons for hours on end.
If You’re Allergic To Debt, Take Some Claritin
Wealth-builders (like myself… only I haven’t really built much yet) see debt as an essential part of their overall strategy. By taking out investment loans and paying interest that is tax-deductible, while realizing average market returns (over an extended period of time) you are building a nest egg with other people’s money. If the stock market isn’t your game, take out a loan to expand your small business, or become a landlord, or use a loan to take a course and expand your credentials and earning power.
Debt doesn’t kill people, people who irresponsibly use debt kill people. I’m not advocating that people take out consumer debt (or “bad” debt as most people call it). Although it is noteworthy to point out that some pretty famous and successful people have maxed out their borrowing capacity to fund their dreams at one point or another, I probably wouldn’t recommend this for most people. Credit card debt, lines of credit, and any other debt that has interest levels higher than you feel you could gain as a rate of return on your investment don’t make much sense to keep in your tool belt. If you can find an investment that beats the interest rate on most credit cards you should seriously give your old pal TM a call! People who take out “interest-only” mortgages, or cripplingly high student loans, or rack up credit card debt, give the rest of us debt-lovers a bad name.
If You Can Make It Faster Than The Bank Will Take It, You’re Good To Go
You see not all debt is that bad. Right now my mortgage is costing me a little over 3%. If I can’t build assets that beat that rate of return then I shouldn’t call myself a wealth-builder. My girlfriend’s student loan debt (around 25K) is sitting there right now as she finishes school. I could lose sleep every night thinking about it, but instead I turn my brain on and realize, “Oh wait, they’re lending her money for free, and then when she graduates, it will still be free money for 9 months… and after that, the interest we pay will be tax deductible, which means it will probably have a similar real interest rate to my mortgage.” You see why would I rush to pay the debt off? Instead I want to jump start the asset side of my ledger, and I’ll worry about those pesky debts when I’m good and ready! The ultimate conclusion of my mindset is to begin the Smith Manoeuvre. The government is actually willing to pay me (through tax deductions) to borrow money and build assets with it. How cool is that?
Case Study In “Pay off debt fast”
My parents are huge fans of the traditional view of paying everything off as fast as possible. They live comfortably now, and you could certainly do far worse from a personal finance perspective. Now imagine how great they could have done had they used debt to their favour. My dad built our house with his own two hands and never owed a cent on a mortgage because he had been saving for years as he worked hard jobs (cutting wood, building railroads, welding, etc). That’s a pretty cool story (and one I’m obviously proud to tell from a human interest perspective), but it’s interesting to note that while my dad was saving all that money in an account that was taxed at a very high rate (taxes on interest income suck) the economy hummed along at a record clip. Imagine how much money my dad could have made by simple taking out a mortgage at variable interest rates, and allowed all his saved money to compound in ETFs/Index Funds in his teens and early twenties? He would have easily been a millionaire by 45. Obviously I’m cheery picking this example, but the point remains that the “save at all costs, always pay off debt fast” mentality often ends up costing us a lot in the end. Young people should stay away from high consumer interest rates, but after that commandment, focus on being an asset-builder and chill on that anti-debt fetish.
Anyone else out there love debt as a great tool in their tool belt, or is “Pay Off Debt Fast” always the way to go?