In another post, I told the story of how I sold all the stock investments in one of my portfolios in order to pay off about 80 percent of our mortgage debt, which is incidentally (and thankfully) our only debt. At one point, I offered a rather pointed opinion about my dislike for debt that I want to write more about. To some people, I might have come across as being very harsh in my opinion about debt, even freaked out about it, but should I be? Is it a modern reality that I and others should just learn to live with because borrowing interest rates are so low, or is one right in trying their utmost to get out of it as quickly as possible?
You’re literally throwing money away
Perhaps my most pointed statement in the other post is how I’ve always felt as though paying interest on debt is like literally pi**ing money away or throwing it on a fire. What did I really mean by that?
Let me put it this way: what is the benefit of interest payments to you and is there anybody who benefits from your being in debt?
Here are my answers. The benefit to you: nothing, absolutely nothing. It’s like you’re literally throwing money away. Interest payments on your debt only benefit the person or institution who lent you the money, what I’ll refer to as the “lender.”
The contrarian argument favors the lender. Could you have bought that house or car if you couldn’t have borrowed the money? Likely not, unless you saved up for years or even decades. Therefore, some people argue (namely, the lenders) that interest payments are just and fair since they’re simply the fee for the “privilege” of being able to get the money that you wanted or needed at that time in your life.
Most people seem to live their lives these days in love with their lender. That is, they seem to want to keep giving it their money. Not only are more people piling more debt into their lives, but not many seem too twisted about having to make interest payments, especially at the enticingly low borrowing rates of the past decade or so. So they mosey along in life, trying not to worry about the debt they have and continuing to making their monthly interest donations to their lender(s), putting up with their burden as long as it doesn’t cut too deep and as long as nobody gets on their backs about not paying off their debt.
However, I think that one’s goal as soon as debt is taken on is to get out of it as soon as possible. The goal of this post is not to present a bunch of statistics – I invite you to do your own research – but I will mention one that shocked me as a young man a couple of decades ago before buying my first property. If you buy a $300,000 property (house, condo, etc.), for example, and you take the typical 25-year mortgage term to pay it off, your property will cost roughly double that amount due to interest after 25 years. This doubling applies to any starting amount. So basically, a person in this example will literally throw another $300,000 ‘out the window’ in the form of interest payments to the lender through which they got their mortgage.
Most mortgages give you the option of paying down a portion of the principal, or the initial amount that you borrowed (in this case $300K), without incurring any sort of penalty. Here in Canada, for example, a person can typically pay down up to 20 percent of their principal each year without penalty. Doing this won’t reduce the monthly mortgage payment (which is a principal plus an interest payment), but it will reduce the amount of interest and therefore the number of years of the mortgage term. If a person can’t pay down a portion in a larger chunk, they can increase their monthly principal payment by even $50 in order to knock a few years off their mortgage term.
I remember putting a $6,000 lump-sum payment toward the principal one year on my first mortgage which had about $95,000 remaining at the time, and this reduced my remaining term from about 23 years down to about 16 years. I was shocked that such a small payment relative to the amount owing reduced my term by nearly seven years! By far most importantly, that also meant seven less years of interest payments.
Regardless of how you choose to go about this, ask your mortgage lender about the different ways that you can reduce your debt as quickly as possible. By not doing so, the only one benefitting is your lender.
What’s the point when interest rates are so low?
I have a friend who works in banking. He managed to get an interest rate of something like less than two percent and so he says that he’s on the “Forever Never Plan” to pay off his mortgage. In other words, he laughs and shrugs off the few hundred dollars he pays in interest each month, whereas I cringe about how he can be so nonchalant about such wasted money.
My friend’s attitude espouses the popular belief that a little bit of debt isn’t a bad thing or that even a lot of debt isn’t bad if you can get a low interest rate. I liken debt of any amount, even the $60 or so we now pay per month with our mortgage almost paid off, to the leak in the plumbing that nobody notices until a ceiling caves in. The point is that debt left untouched – that is, little to no effort put toward paying it off – can one day grow and get out of control if not paid off sooner rather than later. With a mortgage payment this is pretty easy to do because if you start to miss too many payments, you could lose your home. That’s a pretty big motivation to come up with your payment each month! With consumer debt, i.e. non-mortgage debt, however, the motivation to pay it off isn’t as pressing at first.
I realize that I’ve largely focused on mortgage debt to this point. Let’s consider consumer debt for a moment.
Mortgage debt vs. consumer debt
Some might lump consumer debt into one category that also includes mortgage debt. However, I distinguish the two mainly based upon their vastly different interest rates. I don’t know of a mortgage interest rate right now (in 2019) that is more than five percent, whereas I also don’t know of a bank loan interest rate that is below five percent nor a credit card interest rate that is below twenty percent.
Although putting off paying your monthly mortgage amount might cause you to lose your home, putting off your monthly credit card payment won’t immediately cause the creditor to come and take away the TV you bought on credit. It’s more like the analogy of the frog in the pot of water, where the heat gets turned up bit by bit so subtly that the frog doesn’t notice until it’s boiled to death. You just pay your minimum payment and hope for the best, right? But the interest on the unpaid amount, being typically over 20 percent, can cause your debt to soon become a nightmare that spirals out of control. That $1,000 on your credit card for your new TV will eventually become a lot more than double the price with an interest rate like that!
Past a certain point, the phone calls from your creditor(s) will start to happen. They’re afraid that they’ll never get their money back unless you begin to step up and demonstrate some degree of financial responsibility, mainly, spending less than what you earn. (Yes, it is their money, not yours, and so they have a right to get it back however they wish.) You can declare bankruptcy, but then you aren’t allowed to borrow money like you used to and you’re now forced to do all the uncomfortable things with money that you tried to avoid before, like creating your first budget in order to learn how to spend less than what you earn, and to start actually saving and investing money.
Why am I so freaked out?
I believe that debt is one of the most destructive forces tearing people and families apart and ruining lives the world over, in North America in particular. As I’ve mentioned, it’s lure is even more seductive if you only have a little bit of debt and/or it has a low interest rate.
Think about all the people you know who are currently married and also who have divorced. What is often the number-one thing that they worry and/or argue about? Isn’t it about money? Now, imagine the stress involved when it isn’t just about earning enough to make ends meet, but also how much stress is created by having to pay a whole bunch of debt off, not just the amount that was borrowed but also the interest payments? Forget about other peoples’ lives – maybe I’ve just described yours!
Do you think that perhaps this gross mis-management at the personal/household level has had an impact on our broader society? I think it has in ways that most people can’t even begin to imagine, least of all the epidemic of the broken family.
Taking control starts with a decision
Even as a teenager, I learned about and saw firsthand the dangers of too much debt. Thankfully, this wasn’t the case with my immediate family due to my extremely shred mom, but I saw it wreak havoc in some of my extended family.
As a result, I resolved even at that young age to 1) avoid debt as much as possible and 2) to get out of any debt as soon as possible.
I’ve stuck to my guns. I’ve only had small amounts of debts outside of a mortgage for brief periods and paid it off as fast as possible. My wife and I write checks for our vehicles (always used vehicles, by the way). We always pay off our monthly credit card statement in full which, by the way, we only use because we quickly earn points toward free groceries – to the tune of well over $10,000 the past two decades.
Having a like-minded spouse also goes a long way toward avoiding and paying off debt. My wife and I are not fighting a battle with one another about who’s spending more than the other because we’re both largely frugal people. And we’re both as tenacious about our attitude in paying off our mortgage as fast as possible.
(TIP: Consider these financial matters and attitudes when you’re sizing up a potential mate.)
The Final Word
As long as you have debt, you simply don’t have financial control over your lives. Somebody else owns you. To quote some ancient wisdom that is as true today as ever, “The rich rules over the poor, And the borrower is servant to the lender.” (Proverbs 22:7)
Do you really want to be owned by somebody else? Then don’t owe anybody any money, because as long as you do, then they own some part of you. Being debt-free is the ultimate freedom!
When thinking about mortgage debt, until a person pays it off, they technically cannot refer to themselves as a “homeowner” because their lender still owns their house.
In my case, I want my money to truly be MINE, not any lender’s. I want my money to pay for MY lifestyle, not theirs and least of all their CEO’s (even if I own shares in their company). I want my house to be MINE, not the bank’s.
So am I freaked out about debt? Absolutely, and rightfully so. If even ten percent of North Americans were as freaked out and acted upon this by getting rid of their debt, not just their lives would be radically improved for the better, but so would their nation’s and even beyond.