In the previous blog post I talked about what I would have done different in my 20’s, and what I did right. It became apparent that I need to dive into a subject to expound on my view of debt. Most financial advisors will advise lowering your Credit Card debt, pay them off every month, but don’t worry too much about student loans, mortgage, or car loans.
Most people know credit card debt is bad. A credit card can be as low as 8%. I found references to the highest being 29.9%. So, let’s say that a person has $6, 000 on one card. At 8% using a minimum payment of $100, it will take 6 years and 5 months to pay off. That’s a total of $7,688 of interest alone! What about at the 29.9% interest rate? With $6000, we must make a minimum payment of $210. This will take us a shorter amount of time, 4 years and 3 months, but we pay a whopping $10,619 in interest! That’s $2,931 more, with a shorter payoff period! Do you really want to lose 7 to 10 thousand dollars to the bank?
Credit cards a bad, and the banks suck our money? What about car loans? I’m not going to talk about leasing due to I do not completely understand it. Car loans are on average $27,000, 67 months, at 4.04% (60 month instead of 67 months). So, let’s do some calculating. That would mean your month payment is $450.82, paying off in January 2021. The amount of interest paid would be $3,204.77. So you have now paid $30,204.77. Let’s say you bout a $27,000 Chevrolet Impala. After 5 years it’s now worth $17,983. So, now you still owe 6 months on a car that has dropped $9,000. That’s a $12,221.77 difference between what you paid with interest and what the car is worth!
I have to have a car! It’s my transportation! I agree. My wife and I own 1 car. Our situation is she is a stay at home mom, and I use the car for my daily commute. Yes, it can be difficult, but it’s really been nice. We will buy another car eventually, but we will pay for it with cash!
Let’s take it one step further. Instead of paying $450.82 on the car, let’s save it. If you are buying the same $27,000 car, it will take you 4.99 years, 6 months shorter than the loan, to buy the car outright. Of course, you can buy a less expensive car. What happens if you throw that $450.82 into a mutual fund averaging 12% over 5 years? That comes out to be $38,492.04! That means the car you have paid $30,204.77 for could have made you $8,287.27. If you let it sit there for another 10 years, without contributing to it, that would be $119,550.40!
If you really want to get crazy with this, watch this YouTube video!
I’m not against mortgages. It is a fact of life that houses are expensive. Most of us do not have the time to save thousands, hundreds-of-thousands, or millions of dollars to pay full price for a home. At this point, I don’t have a strong conviction over 30 year, or 15 year mortgages. A 15 year will lock you into a higher payment, but get the house paid off faster. A 30 year, can offer you some added flexibility when things are tight, or in emergency situations. My advice currently, and this might change, is to stick with a 30 year mortgage paying on it as if it were a 15 year. This takes discipline, and thus locking it into 15 would force you to do it. Once my wife and I are ready to buy another house, I will write about the process and what we decide to do.
Many financial companies don’t see student loans as bad. It gets you an education, which is good. It doesn’t affect your credit score the same way. It’s usually at a very low interest rate. The average student loan debt is $29, 400 in 2013. At a 5% interest rate with a 30 year term, that’s a payment of $157.83 per month with a grand total of $27,417.20 in interest! Almost as much as the original amount!
From what I have heard, and pretty sure will experience, it takes on average 2 years to become debt free. What if you took that $157.83 and invested it in a 401k over 30 years, average 12% interest? That comes out to be $511,923.22! So, if you took 2 years to pay off your student loans, you would pay a total of $244.85 in interest. Over the next 30 years you would come out with $484,506.02 at the end of the 30 years! So, which is better, paying a total of $56,817.20 to your loan company, or making $484,506.02?
This is why I’m against debt. The banks are in it to make money for themselves, because they understand interest. Most consumers want lower interest rates, but still want loans (from my observance). Why spend the extra money? Save it for yourself! Get out of debt, and start investing. This should be not be an afterthought, give as well. Giving makes you feel good, and helps society in ways that you would not have otherwise. As a Christian, God calls me to tithe 10%. It is my way of giving back to what I have been blessed with.
Yes, these thoughts seem so out of reach for many people. I only paid for 1 car with cash, and that was a $1200 car. I will save my money and pay for my next one. We have no credit card debt, and are paying off that student loan. I’m not going to sit back and watch my future go to shambles because of debt. We will move forward and become debt free, and we will return to being homeowners!
Blessings and prosperity,
Note: These are my opinions and calculations using various free calculators. Please consult a financial advisor or tax professional for more information.