Is Debt a Four-Letter Word For You?

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debt reduction, compound interest, early retirement, financial planningDebt. How does that make you feel when you hear that word? Do you cringe or does it really have no impact on you? I have a debt (mortgage), but I would not say that I’ve been “in debt”. I would say that when you are “in debt”, you have a large amount of debt as compared to your income and that debt keeps growing rather than shrinking. I guess that is the defining line for me; are you paying it down or is the debt growing faster than you can pay it off (which is the negative kind of compound interest).

Do I have a home mortgage? Yes. Have I had car loans? Yes. Have I had credit card debt? No. Here is a little bit of history on some debts I’ve had. I currently have a 30 year mortgage that we’ll likely pay off early. I have had car loans that we’ve paid off early as well. When I married my wife, she had a fair amount of student loans to pay off. Did we pay those off early as well? You bet. In our situation, debt has never been in control of our lives and for that I’m very thankful. In a way, I think debt can be like alcohol. There are many people that can drink alcohol in moderation and it does not control their lives. But, we are all aware that some can become controlled by alcohol and it can bring ruin to their lives if they don’t get help. Like alcohol, when controlled and in moderation, debt can work for some people, but it definitely is not be for everyone. Can you live without drinking alcohol; absolutely. And the same can be said about debt. You don’t have to go into debt; life is way better when you don’t have debts looming over your head. 

I know debt is a hot button and this blog is not really focused on debt, but I do feel it necessary to address a few debt related topics and see where we go from there. As I’ve become a Financial Coach and get to know more about people’s debt situations, I’m becoming less and less a fan of debt. I did want to have some discussion here though to let you know where I stand and also get some discussion going among the community.

Let’s hear from the dictionary first. Debt is defined by Merriam-Webster as an amount of money that you owe to a person, bank, or company. While that is simplistically what it is, I think the definition should also include the phrase “with interest” since it’s extremely rare that you can get a loan with no interest. And that’s where it gets interesting (no pun intended).

Can you live your life without debt? Sure. It’s the best way to live for sure. It’s a matter of choices and trade-offs. You may choose to drive a car longer or live in a house or apartment a bit longer to save up and purchase the car or house you desire without needing a loan. And what if you are OK with some debt. Again, I think it’s about choices and trade-offs. If you buy that newer car, or buy that house, you’re now in a contract to pay the lending institution back which means that there will be monthly payments. Since you will be making monthly payments for your car or home, there will be less room in your budget now for you to save/invest, less room to take vacations and travel, less money to go out to eat, etc. Each person and family situation is a bit different, but definitely consider the trade-offs before you enter into any new debt. Also the concept of commitment seems to be waning in our society, so understand that when you sign on that dotted line to take out a loan, you are committed to pay it back. While there are bankruptcy laws in our country that could potentially discharge certain debts for people, I’m not a believer in dodging your responsibility and going against your word.

Some people are adamantly opposed to having a home mortgage. That’s a great opinion to have. Others are OK with a very low rate home mortgage, knowing that they may be able to pay their mortgage and then make a higher percent return on money that they don’t have tied up in the equity (or down-payment) of their home. This might only be a factor for people who have no other debts besides their mortgage and are getting to be large savers.

There are way too many emotional factors involved with debt for it to be a black and white matter. But, I still feel it’s all about decisions and what those mean for you and your family. How will you decide to handle debt? You need to decide and don’t take the decision lightly, because debt can be vicious if not paid off!

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