Yesterday I wrote an article about 13 loans that scare me to death, but the truth is, almost all debt scares me to some degree. Now I know what you’re thinking – what about a mortgage, what about student loans, what about business loans, yada, yada, yada. What about those all important loans that are taken out to buy an income producing asset?
Yes some debt IS necessary to produce a certain lifestyle. My problem with most debt is that debt controls you. It controls your thoughts, your actions, your motivations, your choices regarding employment, and your life in general. It’s always in the back of your mind.
Debt controls you
Yes, just like the book title reads in Debt Is Slavery, debt puts you in chains of some sort. Don’t believe me? Think of it this way:
If you lost your job tomorrow, would you worry about how to pay your mortgage? “No, I have a 3 (or 6 or 12) month emergency fund.” Great – would you be worried at the mid way point of month 3, 6 or 12 if you still hadn’t found a job? That worry is debt’s control over your life. Now imagine the same scenario with a completely paid for home … it has a whole new flavor.
Debt is what keeps me awake at night. It makes me hedge my answers when asked my opinion at work. It makes me wonder if I have enough insurance. It makes me cautious with spending money on anything at all … especially something frivolous.
I’ve been in debt for all the right reasons:
- business loans
- student loans to get my undergraduate degree
- student loans to finish my degree 15 years later
- student loans to get my graduate degree
and for all the wrong reasons:
- to buy disposable items
- restaurant meals
- cars and trucks
- gizmos and gadgets
- lifestyle debt
When I’m in debt (for whatever the reason), it’s always in the back of my mind. It’s an obligation that never turns off.
Debt drives the insurance industry
Debt is the reason for a lot of insurance. How much car insurance coverage would you get on a new vehicle if it was completely paid for when you drove it off the lot? My guess is a lot less than the bank demands – after all, that car isn’t fully yours just yet.
Avoiding future debt or too much current debt is the reason for mortgage insurance, the reason for a lot of life insurance, the reason for health insurance, disability insurance, and the list goes on.
Good debt vs. bad debt
Is there such a thing as good debt and bad debt? That depends on your perspective. Debt is great when it helps someone buy a home that appreciates in value, provides shelter for their family, and becomes a “home.” That same debt is very bad when the home declines in value, the owners cannot sell it for more than the mortgage balance, and the breadwinner dies with less than sufficient insurance to pay it off, forcing the family to make some very hard choices.
Debt is great when it enables a student to attend the university of their choice but it becomes very bad when the repayment schedule comes due and the student hasn’t found employment with a high enough salary to make the payments.
Debt is great when it helps a family start a business and provide goods and services to the community. That same debt is bad when the business falters and the owners have to sell all their assets to pay off the debt and avoid bankruptcy.
Debt is a double edged sword
Debt is a double edged sword, capable of doing a lot of good, but also capable of destroying your life. Handle that sword with the utmost care and deliberation, not with a flippant attitude.