Not only should we teach men to get out of debt but we should teach them likewise to stay out of debt.
-Harold B. Lee
Possibly the most difficult part about becoming debt-free is finding the desire to do it. It is a lifestyle– meaning you’re going to have to make some very difficult changes and exercise an entirely new level of discipline when it comes to money. But it will be worth it (key word being worth, as in net-worth).
In the book Switch: How To Change Things When Change is Hard, the authors write, “for things to change somebody somewhere has to start acting differently.” You have to experience the “I’ve had it!” moment. Dave Ramsey, author and popular financial expert emphasizes that before people will change they must be “sick and tired of being sick and tired!”
Have you had your “I’ve had it!” moment?
Chances are if you haven’t had that moment, you might not have what it takes to make such a dramatic change in your current lifestyle. However, after you realize how much borrowing money and being in debt is costing you and your family (not only financially), I’m hopeful you will reach that “I’ve had it!” moment in your life. I’ve made my fair share of stupid decisions with money and coming to the realization that I had to change was painful. Let’s pray you don’t have to fall as far as I have before you choose to make the switch.
3 Reasons to avoid debt
1) Borrower-Servant Relationship:
The risks of borrowing money go far beyond paying interest and the ability to repay the debt. There is an unavoidable dynamic which forms in every single scenario where money is lent with a contract for repayment. Whether it is a loan from the bank or credit union, borrowing money on a credit card or line of credit, or receiving money from a family member or friend with a promise to pay it back; once the money is exchanged, and there are NO exceptions, a borrower-servant relationship has been established.
Elder Joseph B. Wirthlin (Quorum of the twelve apostles, LDS Church) warns, “debt is a form of bondage. It is a financial termite. When we make purchases on credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our things own us.”
From the moment the money is borrowed, much of your energy and time and thoughts (and paycheck) are consumed until the debt is repaid and the contract is fulfilled. Many friendships and a familial relationships are destroyed over the burden of borrowed money– including marriages and parent-child relationships.
Without the burden of debt, and the associated stress and anxiety, you will be able to think more clearly, make better financial decisions, build wealth, and take better care of your families. The First Presidency of the Church of Jesus Christ of Latter-Day Saints has promised if you pay off your debts and live debt-free you and your families will “feel more secure and enjoy greater peace in your hearts.”
2) Decreases Wealth-Building Power:
Your income is your number one tool for becoming debt-free and building wealth . The more money you borrow and the more you fill your life full of payments, the less likely you will be able to accumulate savings and retire with a healthy nest egg.
How long have you been working? How much money have you made in your lifetime? How much money do you have in savings? Do you have an emergency fund? Do you have money saved for retirement?
Asking these questions to myself led me to my “I’ve had it!” moment. I realized that I had been working for nearly 10 years and had probably made over $200,000 in my young life. But I had NO savings, NO emergency fund, definitely NO retirement plan, and was on my way to nearly $80,000 in debt. My future dreams of vacations with my new bride, owning a home, and starting my own business seemed nearly impossible. This made me angry. It made me desire to change.
Change your mentality.
Stop asking “what is the down payment and what are the monthly payments?” and simply start asking “how much?” If you can’t afford to pay for it WITH CASH, then you can’t afford it. Don’t buy it! Get on a budget and a responsible cash-flow plan in order to purchase the things you need.
How many of us (I include myself) have a monthly income that is devoured by payments with very little of it remaining (if any at all) to do other things? The paycheck comes in and goes out on nearly the same day. Car payment. Credit card payment. Furniture store payment. Medical bill payments. The list goes on (and on and on for others like myself). These monthly payments destroy our ability to save money and build wealth.
According to Kiplinger’s Personal Finance Magazine, the average car payment in the US is $479 over a 60 month period– nearly $29000 for a car that will lose over half its value before the loan is ever repaid. Do you realize what you could do with an extra $479 per month? If you were to invest the $479 monthly in a good mutual fund at a 12% rate of return (yes, it is possible if left there long term), after 10 years you would have nearly $110,000. After 20 years you would have nearly $470,000. And after 30 years… nearly $1.7 million! This is what your car payments are costing you. Get out of the car payment cycle. Drive a used car you can afford and that you pay for with cash by following a good cash-flow plan.
I’m not saying it is easy to invest nearly $500 a month. It requires discipline and careful, intentional budgeting. And I’m not saying you’re evil if you have a car payment. I have a car payment (only $900 to go!). But these are the things that have inspired me to think differently and change the way I operate my life and my money. No more car payments!
3) Credit Causes Over Spending:
Using credit cards and other forms of borrowed money add interest and other fees to everyday purchases. Research shows that making purchases using credit cards and other forms of credit cause consumers to spend more than they would if they used cash. Consumers are likely to spend even more on a credit card if it is a rewards card. A WSJ.com report indicated that consumers who use rewards cards spend an average of $68 more per month and carry an average balance of $115 more on their cards than other consumers.
Using cash to make purchases is more painful– we tend to feel the loss more easily– than when using credit cards. When using credit cards, consumers pay less attention to the prices of the products and the amount of their purchases. Using cash makes it easier to stick within a budget and control spending.
Debt can be a terrible thing. It is so easy to incur and so difficult to repay. Borrowed money is had only at a price, and that price can be burdensome.
– Gordon B. Hinckley
Avoiding credit cards and other forms of credit is very difficult. The marketing strategies of banks and credit card companies make borrowing money very appealing and hard to resist. However, with the high interest rates and their fine print policies, once a consumer goes into consumer debt, digging out is extremely challenging. Don’t fall for 0% interest-no payment for 12 month offers and other “90 days same as cash” type promotions. The truth is that very few people actually pay off the balance before the interest kicks in.
For example, Let’s say you go on a family vacation and you charge $1500 on a credit card with an interest rate of 18%. If you only make the minimum payment ($37) it will take almost 13 years to payoff and will cost you a total of about $3100 ($1600 in interest).
In house financing and retail credit cards (Kohls, Victoria’s Secret, etc.) also cause consumers to overspend. Retailers offer instant rebates and instant discounts to their cardholders to entice them to use their cards when making purchases. These companies are not dumb. Do you really think they would offer these discounts at the risk of losing revenue? No. The reality is that consumers actually spend more than they normally would because of the discounts. The discounts encourage more purchases on impulse causing consumers to rationalize their overspending because “it is on sale.” With the addition of high interest rates and other finance charges, retailers actually end up gaining more revenue when these cards are used as opposed to cash purchases. Don’t get sucked in! Have a plan when you shop. Use your budget, resist the impulse purchases, and use cash. Believe me, I fell for these promotions myself. One Target Visa with a 10% discount on my purchase quickly led to a balance of $2500 which quickly turned into nearly $20000 (see How My Journey Began).
Avoid debt. Debt is costing you big time. It is costing you your dreams and your future. Get on a budget. Be modest in your spending. Live on less than you make. If you’re already in debt, pay it down as fast as you can, and get out of bondage. You will have greater control of your life, greater peace in your hearts, and freedom from worry.