subject: Debt free living - brilliance or stupidity [print this page] Debt free living - brilliance or stupidity
Too many people claiming to be financial experts are to be found everywhere advising people how to manage personal finances so they can pay off all debts and live debt free. One must pay off all debt, they scream. These financial self proclaimed philosophers hold on to the stake that debt of all kinds is bad. These so called financial experts want you to pay off every loan that you may have and then once you have paid off all loans they then want you to pay for everything strictly with cash only. And then to add some noise to the process and sound and lighting effects, they want you to cut up all the credit cards and scream that you did so and may be call all your acquaintances and friends and unknown people all over and announce to the whole world about your financial accomplishment. But the biggest question that you need to ask yourself is the following. Is the goal of being totally debt free a brilliant one to aim for or is it absolute stupidity. As a clue to this answer, have you ever noticed that the people that advise that debt free living is the only way to go are all generally older people that all had debt of some kind at one point or the other and that they did not buy their first home or second one for that matter for cash. How can you advise people against any debt when you yourself have not practiced what you preach.
It is virtually impossible to be debt free and make progress. Most successful corporations in the world have debt. There are of course a few exceptions like Microsoft that have no debt. But for the majority of companies in the world, there is some level of debt service to take care of. They cannot grow if they do not borrow to purchase machinery or to expand in to new markets and such. So does it make all these corporations stupid when it comes to financial matters. Of course not. Tell a twenty five year old young graduate engineer who earns a pretty good salary and wants to buy his first home and has saved up twenty percent of the asking price, that he has to wait twenty more years before he can buy his first house for cash and he will laugh you out the door in no time.
He does realize that his savings may never keep up with inflation to buy the silly first home in the first place for cash. You graduate from college with a wonderful degree and landed your first dream job right away and you need a good car to get back and forth to work, so are you going to wait until you save up enough cash to buy a car to get to work. But you need the job to buy your car which is what will take you to work. Unless you get a loan at least initially to buy that car, you will never really even get off the ground. As you can see, getting into debt at some point is virtually unavoidable in the modern world. And the moment you become totally debt free, where are you going to put all the money that you save. Probably in a bank. And what do you think the bank does with that money, put it in another bank. No they lend it to companies at a higher interest rate than what they pay you. So the banks are in the lending business themselves.
If you perfectly follow the holy financial gurus, they should outlaw all banks too. Well, the moral of the story is not that ALL debt is bad, but it is bad debt that is bad. If you get a loan to buy something that is going to keep depreciating with time and is something you do NOT need, then that is bad. A car is a depreciating asset but you need it to take you to work. So do not go and buy a car way beyond your means but there is nothing wrong in getting a loan to purchase a reasonably well driving machine and of course once you can pay off the debt, do so and save on the interest payments. Same is applicable when you need to buy a house. Buy a reasonable size home that you can afford to make the payments on and by all means pay off the debt as soon as you can and move on.
The key is to be able to manage the payments very comfortably with sufficient money set aside for emergency purposes and to get loans and financing from banks only to buy things that you really need and not for frivolous things or unwanted luxuries. How well you manage your money and how well you service your debt is the key to avoiding failure and getting into financial trouble and you need to do a lot of hard work in order to succeed just like it is in every excursion in life.
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