Not surprisingly, I still get email (or tweets) from people who’ve read IOU NO MORE, and want to know more about why I think managed debt is all that bad. (I got that question just today via one of the discussion boards I’m on). After all, well managed debt allows us to have nicer things and can improve our credit scores. Right? Besides, Sam, I get a tax break on my mortgage interest.
Those are all fair points and I’d like to address them, briefly.
First, I’m not the debt police. I have some very strongly held positions on the subject, but I’d never dream of getting all up in someone’s grill who disagreed with me. So when you read my reply, take it as advice from someone who cares about you, your family and your future, but who will not judge you. This is a safe place.
Let’s take the objections out of order. 1. Managed debt improves our credit scores. Yes, that is true, but so what? Why do I want a big credit score? Unless, of course, I plan to borrow more money, that is. Dave Ramsey calls a credit score, “An I love debt, score”. I tend to agree. People scramble like crazy to get the right balance of credit cards, auto loans and mortgages to see how high they can get those scores. Why? So that when they want to borrow more money they can get it at a lower rate. I’m never going to borrow again, so I’m not impressed.
The math doesn’t follow the logic, either. If I have debt, I’m getting stars for paying the bank all that extra money so they will want to loan me more. If I have no debt, though, I’m able to pay ME all that money I was paying the bank. Would I rather pay the bank or pay myself?
The better rate argument is also somewhat of a myth, too. Take a mortgage for example; if you have a good income track record and can make a strong down payment, you’ll get a mortgage at a good rate and you won’t have to sweat those worrisome debt to income ratio investigations.
Now, let’s dive a little deeper on the mortgage interest thing. Let’s suppose I have a $100,000 mortgage at 3.5% because of my outstanding credit score (which I could get with a good down payment, but we already said that). I get to write my mortgage payment off my taxes, right? Not exactly. It’s not my mortgage payment I’m getting to deduct from my taxes, it’s the interest. Not playing the compound interest game, I’m paying the bank $3500 in interest.
If I’m in a 28% tax bracket, the tax break on $3500 is $980. So I’m paying the bank, $3500 to keep from paying the IRS $980. Someone please help me understand how that’s a good deal. I’d rather pay the Govt. (even administrations I don’t like) $980 and keep the $2520 for myself.
Even if I was desperate to unload $3500, I’d rather give it to my favorite charity where I know the money is being used wisely than to any Government, because they can’t even spell, ‘wisely’.
Let’s move on to the ‘allows us to get nicer things’ objection. I’m not really thinking that’s true. I’ve never known anything that can’t be purchased with cash at least as easy as with credit. In fact, many times you can get a better deal by laying down ‘Benjamins’.
What credit DOES allow you to do, is be impulsive and buy the ‘nicer things’ before you can actually afford them. We can achieve instant gratification. Is that a noble goal?
In Sam’s world, it’s all about risk management. The less debt I have, the less risk of either the country, the bank, or I have financial challenges.
Debts I DON’T owe can never be called in. If I have no debt and the country, or my state goes belly up, I don’t have to worry nearly as much as if I have outstanding debt. If something crazy happens and I lose my job, I don’t have to worry about losing my house or my car or legal action.
One more thing; if I eliminate debt, even well managed debt, I have something I didn’t have before…cash. With cash, I can buy all the nice things I want.
Now you know why I believe and practice what I do. If you feel differently, it’s ok. I’m not going to get mad at you. You get to choose for yourself how you want to manage the money you work for.
What’s REALLY weird about my financial views is not what I think about debt. Those are radical, but not weird. What I believe about preparing for the future and the Stock Market is radical AND weird. I’m way out of the norm on that one, but it will have to wait for another day. I’ve caused enough turmoil for one Monday.
I would love to hear from you about your money management challenges and victories. Are you debt free? Are you working a plan to become debt free? Do you wish someone would help you get on the road to freedom? Do you pooh, pooh the whole idea? Let us know. Let’s talk.