Sometimes, I wonder if Francis is reading my mind or something. I don’t understand how a curmudgeonly Yankee 2000 miles away can know me so well, but there it is. Today, in Who Has A Hold On You?, Francis brings up the matter of my own bad experience with mortgage debt, documented here. It’s one of those moments that stands out in my memory because when I bought that house, I was a reader of his earlier blog incarnation Eternity Road, wherein I argued that purchasing the property in question was good. Francis was patient with me at the time, and that was a seed that took a little while to sprout.
When things went bad, I had the opportunity to reflect on why Francis had been right all along. Debt is serious business, and Americans today make far too little of it. They do not understand the seriousness of the obligation, and enter into debt casually and with minimal reflection as to the risks and costs associated with it.
It was almost three years ago that I rid myself of that property. The moment I handed the keys to the bank, I was barely clinging on to middle class. In the years since, my income has tripled, my net worth has skyrocketed, and my general quality of life has improved immeasurably. The debt was holding me back that much. The time spent managing the rental property was turned over to productive contract work. Much of my savings was put to work in investments, a couple of which paid off well for me. I paid off all other debt and deliberately lowered my standard of living.
Now I have one remaining mortgage, which is at 50% loan-to-value, and for which I have sufficient assets to cover if I really had to dispense with it. I have one investment which, if it pays off as expected in the next few months, will rid me of that last remaining debt. Even if that doesn’t pan out, the balance will be gone in a year, two at the most, even without liquidating my other assets. I have no other debt whatsoever.
The difference is night and day. No consumer good, not even a house or a car, is worth the level of stress and obligation imposed by debt. Many people will say things like “don’t flush your money down the toilet with rent” or “I can totally make more in the market than the rate I’m paying on my car loan.” Technically, these statements are true. But most folks who have car loans do not have the liquid assets to cover the balance earning interest in the market. Many of those who don’t want to flush money down the toilet by renting end up screwed by a finicky real estate market. They lose much more. These are generally hollow excuses for justifying spending, not sound financial advice that is actually followed.
Since the insurance mess that led to the problem with my old house, I’ve become a lot more sensitive to how debt shackles you in ways you don’t fully comprehend when signing the note. You think you are signing on for a relatively fixed payment on a balance that, after the accrued period, will go down. As long as the payment is sufficiently affordable, everything is okay, right? No. Financial market manipulation, government regulation, and insurance schemes can conspire to lock you into the property and shackle you to a specific geographic region. No longer can you shop for higher paying jobs elsewhere. The albatross is stuck around your neck. The neighborhood can be destroyed by government insurance scams and prevent you from ridding yourself of it if you don’t have assets to cover the note balance. That is only one scenario that can play out – I’m sure many others exist.
Point is, if I had it to do over again, I wouldn’t accept any debt like that for anything less than an immediate life-saving emergency for either myself or my family.
I’m not saying debt is always bad. Sometimes playing the spread for investment purposes can be good, if you have the underlying assets to cover it. Sometimes, you would rather borrow money for something than liquidate a productive asset. And in a business, where personal liability is no longer a concern, debt can be considered as part of your overall risk strategy in the business itself. But in this, I consider debt to be rather like a chainsaw: a dangerous but often productive tool when not pointed at you personally. Never turn the chainsaw toward yourself if it can possibly be avoided. Certainly don’t do it because you want a bigger house or a nicer car. It’s not worth it.
Debt can be used as a tool to silence you. It can force compliance with the Overton Window. It can shackle you to a bad job, a lower income, and bad neighborhood.
I will reiterate: since eliminating most of my debt, my income has tripled. And yes, it’s directly related to that increase in income. The elimination of a monthly loss, combined with the need to manage it as a rental property and all that time that took, plus the general stress and the tie to a specific geographic area… ridding myself of the property was one of the best things I’ve ever done in my life. Without debt to hold me back, and with the increase in income, my net worth exploded.
I know not everyone had an experience as bad as mine, but even so consider how much debt might be holding you back. And ask yourself if the stuff is really worth it. Most of my furniture is stuff I purchased second hand for 1/10 the retail price. My car is much more modest than most at my income level, but it’s mine, I don’t owe anybody money on it. I don’t have a particularly nice TV, the latest video game consoles, or a lot of knick knacks and consumer crap. The house is pretty bare compared to most. I have a few luxuries, like a humidor full of some good cigars (that was a luxury I had to give up for a while, back then) and a liquor cabinet with some of my favorite whiskies. And that is good enough for me.
Most people in my neighborhood think my wife and I are rather poor, because we live much more modestly than most of them. A few months ago, one asked me what I made in a year, and when I told him he nearly spit out his beer, and asked why I hadn’t sold the house and moved into one of the new trendy neighborhoods down the street.
No thanks. I like how things have gone these last few years, and I’ve no desire to go back to the way I lived before. It’s a good feeling knowing that, even if your possessions are more modest, and you don’t have the latest trendy whatever, what you do have is yours. If folks think I’m a little poor, or at least not well off, that’s fine too. Substance matters more than appearance, anyway. It’s a nice way to live, and I hope other Americans find their way to it eventually, too.