If you’ve read the horror story on my old house, or experienced something similar yourself, you have some understanding how debt can go bad. You do not even have to be a spendthrift to fall into the trap. All that is required is to follow conventional “wisdom.” Ignore all of that. Forget interest rate comparisons, or whether or not some debt is okay. Instead, live by this:
If you can’t pay cash, you can’t afford it. No exceptions.
Now, just because you cannot afford something doesn’t mean it’s not necessary. If, for example, your family was going to starve and the only option was to put the food on a credit card, do it. But understand what this means: you don’t make enough money and you must reduce your standard of living immediately. If it isn’t a crucial need, the answer is simple: don’t buy it.
Mortgages are not an exception. The recent real estate disaster should be ample warning that real property is far more speculative than most people realized. Financing it is stupid. Conventional wisdom suggests that you shouldn’t piss money away on rent, but this fails to take into account the other disadvantages of buying a home on credit.
If your home goes underwater, you cannot move out of it. This means you may be stuck in neighborhood that is going downhill. You may be unable to move to pursue more lucrative job opportunities in other markets. Even if you are above water, moving is now far more difficult because the home must be sold first and the financing must be dealt with. As in my circumstances, a financed home can also by screwed by insurance providers, because the lender requires you to purchase that insurance, no matter what it costs.
A home that you own outright is far less of a burden. Insurance is optional. Renting it out is usually profitable even in the worst of circumstances. Selling it is easier, and you have no set number you must reach in order to make a deal.
Car loans are no exception. People will excuse their extravagance by claiming that older cars require expensive repairs. This is the rationalization hamster spinning in overtime to justify an emotional decision in favor of the new car.
I owned a 2002 Ford Explorer I bought in 2011 for $4500. It was a hunk of junk with nearly 200,000 miles on it. The tailgate was broken, the electrical system was a disaster and the motor was temperamental. In the worst year, expense wise, I paid about $1000 in repair bills. Sounds like a lot? Consider the average new car is in the $30,000 range and requires a payment of over $550 per month for 72 months at around 5% interest. In one year, you would have paid for the beater-mobile and its repair bills. You’d still have 5 more years of payments to go, too. And then, at the end of it, you’re still going to start paying repair bills anyway. When the Explorer became too obnoxious, I got rid of it for about what I paid for it. Crappy cars have minimal depreciation, because even their scrap value isn’t far off from what you paid for it.
That doesn’t mean you must drive a jalopy, mind you. If you have $30,000 in cash and you want that shiny new car, by all means, treat yourself to the luxury. You can afford it. Same thing with that modern home and its granite countertops. If you have the cash, go for it if you think it makes sense.
After driving the jalopy Explorer around for a few years, I financed a newer truck. This was a mistake. It wasn’t long before I regretted it. The tax bill from the deed-in-lieu on my rental property meant it had to go. At least I had put money down and bought a basic model, so escaping the loan wasn’t terribly difficult, but that was a matter of good fortune, nothing more. I am negotiating a deal on a vehicle I will own outright, should we reach terms. It is a modest 2011 with 70,000 miles on it. But it will be mine, and not the bank’s property. I will have some cash leftover to handle my tax bill.
What happens if you cannot afford a jalopy in cash? The answer to that is you cannot afford a car. When I was in my early 20s, I rode a bicycle 10 miles to work every morning. No insurance, gas, car payment or any of that. In America, we are accustomed to thinking of cars as a need when they are really a luxury item.
Credit cards and consumer good financing are the worst. I had a neighbor who financed most of his furniture, then financed his front yard. Then you have those rent-a-centers and, to top it all off, rent-to-own car rims. You should get a credit card or two for credit-building purposes, but not to obtain debt. Oddly enough, insurance companies and some HR departments use credit scores to evaluate you in ways that have nothing to do with debt (this should be illegal, but it isn’t, presently). So satisfy this by getting a few credit cards and never carrying a balance on them.
One of the few good decisions I ever made regarding debt was never running up balances on credit cards. I keep them for emergencies only.
My readers might ask: what if I’m already in debt? Get out, quickly. Sell high-dollar items that you don’t need. Trade down for a lower-end vehicle. Pay dispensable income toward the debt instead of vacations or new consumer goods you don’t need. Most people will find, as I did, that most debt can be dispensed with rapidly if you have self-discipline and live in a spartan fashion.
When bribing my old tenant to leave the property, she left dozens of bags full of consumer goods that were utterly worthless. Little signs that said something to the effect of “this is a happy home” painted on a piece of particle board by some factory worker in China. You see these things for $10 at Target. They aren’t worth $0.25 in a garage sale. There were pieces of worthless furniture, falling apart even thought they were only a few years old. Bags of full of clothes that she probably only wore once or twice were everywhere.
For her, they weren’t worth the effort to move them, yet if you tallied up the retail price of the items, there were thousands of dollars in knickknacks. What if you could spend that money on paying debt down, or creating savings and investments?
Dispensing with consumer crap feels good. All of that stuff you have carries a psychological weight. You have to store it, find places for it, deal with it when you move. That is in the back of your subconscious whenever you contemplate moving for that lucrative job, or leaving for the weekend and locking your door. Your possessions wind up owning you.
The modern economy is in terrible shape. If you are younger, as I am, you need to be lean, mean and prepared to follow the winds of the economy immediately when opportunity presents itself. You will fail, otherwise, unless you are well-connected to the ruling class.
And that ruling class wants you to fail. They want to destroy you. Debt is their weapon. Serfs were tied to the land, forced to work for their masters and give up the fruits of their harvests. They were in bondage. If you have debt, you are also in bondage. You are also a serf. The only difference is that you consented to become a serf. This is intentional. They are resurrecting serfdom and using debt to do it. At some point this may become involuntary, but for now it is still an opt-in process. Don’t turn on the TV and become enamored with beautiful cars. HGTV is bullshit; you don’t need granite countertops and hand-scraped wood floors. Certainly, you don’t need 5000 square feet of McMansion for a family of three. If you buy these things with debt, by assured that your descendants will till the land as slaves.
Government is in debt. Companies are in debt. Individuals are in debt and the lunacy has gone so far that our currency is, essentially, debt-money.
In the future, I have no doubt that modern America will be held up as a nation of fools, selling themselves voluntarily into the chains offered to enslave them.