Is it possible to be totally debt free or are we kidding ourselves?

what we’ve been told

I had been a follower of media personalities who preach about personal finance.  Dave Ramsey and Suze Orman believe that debt is the devil.  The borrower is slave to the lender.  In some instances, that’s the truth which is why these personal finance gurus have millions of acolytes.  I, however, am no longer one of their followers.

erasing the debt

Legions of borrowers have been on a mission to get out of debt during the coronavirus pandemic.  Some have debated the advantages of the snowball method versus the avalanche method to get debt free.  I have seen countless articles about erasing debt.  If you have outstanding debts, keep making those payments and realize that you’re not alone.   Paying off your bills will lead to a higher credit score over time, but it can also leave you cash poor and really stressed out. 

finding the right deal

Several years ago, I needed a new mattress, so I went to my local mattress store.  I tried out every bed in the building until I found the mattress that was just right.  I was shocked to learn that the mattress of my choice would cost $3,000.  The salesman offered a deal where I would pay no interest for 48 months!!  The monthly payments worked out to be $62 per month.  While those who preach against debt would have bought something much less expensive, I took the deal.  I have had the benefit of a good night’s sleep ever since.  My back thanks me daily.

good debt vs bad debt

All debt is not created equal.  Some debt is bad and serves no purpose except to be a drain on your finances and net worth.  Perfect examples of bad debt are revolving credit cards and payday loans which charge onerous interest rates that can be as high as 29%.  Ouch!!  You can spend years paying a debt and have no memory of what you actually bought.  Conversely, good debt is the kind that we obtain to acquire an asset that will appreciate over time.  Examples of good debt are mortgages for a home purchase or business assets.

6 tips for smart financing

Financing may not be the most desirable way to make purchases, but for most people, it’s often the only way to afford the expensive things we want in life.  Debt is also necessary to have a good credit score.  Totally avoiding debt is just impractical.  Instead of painting all debt with the same brush, you need to pay attention to these tips:

1.  Be smart about what you choose to finance

Consider what you’re buying and how you intend to use it.  You should also consider the useful life of the item.  In other words, if the item will benefit you for a long time, it may be worthwhile to finance it.  I would always recommend financing a good used car rather than paying for it in cash.  Why invest $15,000 at once in a depreciating asset?

2.  carrying a balance with interest is never a smart move

The extra interest will cause the total amount of your purchase to double or triple over time.  Pay the full balance each month to avoid interest.  If that isn’t possible, pay more than the minimum payment to limit interest charges.

3.  ALWAYS READ THE FINE PRINT!!

If the interest rate is too high or you can’t make full payment within the promotional period, don’t take out the loan.  Predatory lenders make a mint from unsuspecting consumers every day.  They know that people can be distracted or intimidated while making a purchase and miss some very important details.  These mistakes can be very, very expensive.

4.  Never negotiate a deal based on the monthly cost alone

This practice usually occurs when haggling over the purchase of a car.  If the salesman asks you how much you can afford per month, be careful.  Often the price of the vehicle is inflated, the interest rate is outrageous and extra bogus fees may be added.  A used Chevy with 150,000 miles may be worth $5,000 but end up costing $12,000 if the consumer only focuses on the $250 monthly payment.   

5.  Focus on adding extra income streams

Instead of stressing about the debt that you’re carrying, figure out how to bring in extra income.  For instance, if you have a regular job, rent a room in your house and drive an UBER part-time, you will have 3 income streams.  In case you lose your job or your tenant moves out, you will still have some income.

6.  Invest in you!!

You are the best asset that you have.  Figure out where your strengths lie and monetize it.  Perhaps you have a knack for applying makeup or interior design.  Take a class at a community college or watch some how-to videos to help you improve your skills.

finally…

A final thought that I will leave you with is this:  Rich people believe in using other peoples’ money.  They will borrow the most money for the lowest interest rate over the longest term possible.  What do rich people do with their own money, you ask?  Anything they want.