2017. A new year. A chance to reflect on the past and make goals for the future. Each year, close to half of American’s make New Year’s resolutions, and consistently a top 5 resolution is to spend less, and save more. Essentially, make better financial decisions.
My New Year’s resolution for you is to lose the D word. Forever. Drop it. Leave it. Don’t need it. Never liked it anyway. Maybe you’ve guessed it by now, but the D word is DEBT. Get out of debt. Over 80% of people are in debt. Now you may say, sure sure, but most of that is just mortgage debt. And yes, you would be right, but let me tell you this. A study done by the Pew Charitable Trusts in 2015, found that 69% of people view non-mortgage debt as essential. ESSENTIAL. No, no, no.
Let’s break this down a little. What is debt anyway? In layman’s terms, debt is using someone else’s money to buy something that you CANNOT afford.
- Home loan: Couldn’t afford your home.
- Car loan: Couldn’t afford your car.
- Student loans: Couldn’t afford your education.
- Credit card debt: Couldn’t afford XYZ.
Now at this point, I can feel you getting upset with me. But Caleb, my family needed a home and I needed an education. Yes, I understand, and there are some types of debt that I can live with, but still, let’s not lose the basic premise: DEBT is the result of buying something you could not afford.
Why do I dislike debt some much and why should you? One word. INTEREST. I like to think of interest payments as wasted money. Poof. Gone. Flushed down the toilet. Think about it. What are you getting from your interest payment? NOTHING.
Let’s run a quick example to illustrate. Say I buy a house for $200,000 with a down payment of 20%, and a 30 year fixed-rate mortgage at 4.37% (the current average rate.) Making my normal interest payments, I will end up paying close to $130,000 in INTEREST ALONE for my home. Now, let’s play this back. The home is worth the $200,000 that it was priced at, but overall I ended up paying $330,000 ($200,000 + $130,000) for my home. This is the same as over-paying by 65% on the house. Say I went to the store and bought a bag of groceries, and then came back home and told my wife “Honey! I got a great deal! I bought this entire bag of groceries and paid 65% more than the groceries are worth!” I think you see my point. Any type of interest payment is lost money.
So, if anything, make it your goal to get out of debt as quickly as possible. Save yourself the interest payments. After all, who wants to spend money and get nothing in return?
Stay tuned to future posts for tips on how to save money and get out of debt!