Wednesday, January 19, 2011

Why Debt is Bad

Debt is Bad.  Saying that in America is like saying you are Communist.

Debt is bad.  Period.  And saying that in America is like saying you don't like Mom and Apple Pie.  But my Mother was a psychotic alcoholic lesbian.  And Apple Pie is over-rated, frankly.  Too many calories.

But seriously, debt sucks.  When you, as an individual, take on debt, it generally means you are living beyond your means - spending more money than you have, by definition.

But most people fail to see that.  They worship the almighty credit score, as if it was God's own indicia of their worth in life.  "Almighty God, grant me a 770 and I will never sin again!"

So they whine, they complain, and they BEG the banks to lend them money.  "If I'm lucky," they say, "the bank will lend me money for a new snowmobile!  Yeee-Haw!"

But the truth is, for consumers taking on debt is no big privilege, nor is it a smart idea.

So why does the government and many economists sell the idea that debt is good?

Well, for industry, debt can be good.  If I run a stamping plant, and I get an order for 500,000 car fenders, if I can borrow $500,000 for a new stamping machine (securing the loan with my company or the machine in question) to make those fenders, it is worthwhile, as I can fill the order, get paid, pay back the loan, and maybe hire two people to run the machine.

The availability of capital in the form of money from the sale of stock, or from loans, be it bank loans, lines of credit, corporate bonds, or whatever, allows businesses to expand and grow - to borrow money to take risks to make more money.

Similarly, a farmer can go to a bank and borrow money to buy seeds, or a tractor, or a new plow, securing the loan with his farm, he can plant crops, harvest them, sell them, and pay back the loan and make money.

In all of those scenarios, debt makes "sense" in that it creates more wealth.

But for consumer lending, there is no wealth creation, just wealth dissipation.  So you borrow money for a Jet Ski or a Penis Boat, and..... you spend more money on a depreciating asset which barely secures the loan and generates no income to you.  You are taking a "toy" and for every dollar it cost, making it cost $1.50.  The problem with debt is that you have to pay it back.

It makes no sense at all.

There are few instances where consumer loans make economic sense.  But even then, you cannot profit from a loan, so the less you borrow, the better off you are.

For example, a student loan can be useful in that it can pay for your education, which if you properly invest the money, will pay back in the form of increased earnings. 

On the other hand, borrowing student loan money to go to a bogus "for profit" school, however, is just squandering money.  And borrowing student loan money to study advanced bullshit at Party-U is just a mortgage on your future.

A home mortgage can be a good investment, if you buy a reasonably priced home for your income level.  If you have a 30-year fixed rate mortgage, your house payments could end up being less than rent payments, over time and with the tax deductions, and thus save you money, even if you pay nearly double for the home when you include interest payments.

On the other hand, going heavily into debt for a "hey look at me!" house with "luxury" features that you really cannot afford, is not saving you any money, and the idea that you can "sell it at a profit later on" is only speculation.

And you should NEVER, EVER speculate with borrowed money.  Even professional speculators use other people's money - not money they are liable for.  For a consumer, you can't afford to do that.

What about car loans?  These are generally a bad idea.  You are far better off saving for a good secondhand used car.  But a short-term loan through your credit union, with a good down payment, is not a bad idea, if you are just starting out, and plan on keeping the car for 10 years - at least 5 years after the loan is paid in full.

On the other hand, borrowing money (by buying or leasing) so you can have a new car every 3 years and continually having car payments for the rest of your life is a really poor idea, as you are paying top dollar for the car as well as top dollar for insurance - and you never own anything at all.

The debt lifestyle is so prevalent in America - it is part of our culture.  People have basically accused me of heresy for saying otherwise.  Everyone has debt - how can it be bad?  But it is.  And worshiping it - worshiping at the altar of the false God of debt and the credit score is the real heresy.

When you live a cash lifestyle, you spend a lot less - only the money that you have.  But you have so much more of it!  When you stop paying interest payments, your effective income raises by nearly 50% or more.

Think about how much of your monthly car payment, credit card payment, and mortgage payments are all interest.  Most of your mortgage probably is.  Hundreds of dollars of your car payments and credit card payments probably are.

Suppose you could go from totally debt-ridden to debt-free?  You might have the same amount of money in the bank, but you'd save, what, $10,000 a year in interest payments?  Maybe $20,000 a year in interest payments?

Last Year, I paid over $18,000 in interest expenses, between mortgage and credit card interest.  18 grand, and that's not counting my interest for business expenses.

That is a lot of money for someone making $100,000 a year.  Don't think that enough money to buy a brand-new Camry every year isn't a lot?

Consider this - money SAVED is not taxable.  So to get the equivalent as an increase in income would require me to make more than $40,000 a year more, to pay the personal income tax, social security tax, medicare tax, self-employment tax, and state tax.

Forty Grand - that is a heck of a pay raise.  And all I had to do was sell off "things" and pay off "debt".

In your own life, look at your balance sheet and how much you are spending on interest every year.  If you own even a modest house, a modest car, and a modest credit card balance or student loan payment, chances are, you are spending at least $10,000 a year on interest - perhaps much more.  And if you figure out how much you'd have to make, in your tax bracket, to take home that much cash, chances are, it would be $20,000 or more.

When do look at the numbers that way, being debt-free doesn't seem like some far-off dream, but an urgent need.

Drive an older car.  Cut out cable TV.  Put every spare penny you have into paying off DEBT.  The sooner you can get debt-free, the more you can save and the wealthier you can be.

And no, a tax "deduction" for mortgage interest doesn't compare to not paying interest at all.

Wake up America!  We have been sold a false God and a bill of goods!  The Debt God is false - and evil.

Save yourself, before it is too late!

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