DEBT IS NOT YOUR FRIEND
There are many out there who would tell you that you can “leverage” debt. You can play with other people’s money. There is such a thing as good debt.
Some are as audacious to say that you should borrow money to invest (real estate, stocks, etc). However, none of these people would factor in risk in their equations. This is one of the most critical steps in finance, accounting for risk.
Mask anyone who bought a house before the 2008 housing crisis. Ask anyone about their retirement accounts around that time. Ask anyone with any type of investment and they will allay you with the perils of a tanking market.
All this tells us is that there is real risk, not only in “the market” but in everyone’s everyday life.
Imagine you believe in leveraging debt and you take out an unsecured line of credit (LOC) of $10,000 at 6.25%. All in all you’ll pay around $11,000 for this loan. So (the theory goes) if you find an investment that makes more than that you’re golden!
The problem is that the average investor, over the last 10 years has averaged a 2.6% annual rate of return. That would equate to $260 for a loss of $740, not great. Now layer on top the fact that you didn’t have the money in the first place. You borrowed it, now you owe it.
Now take that same scenario but use $10,000 you saved. You made $260 as an average investor. As long as we have the ability to delay gratification and maintain a true understanding of our motives and abilities we can make wise decisions.
Now this example is based on someone using debt as an investing tool but in reality the average person interacting with debt is not doing it to invest. They are incurring debt to buy a bigger TV, car, appliance or go on that trip they’ve always wanted and/or deserved.
There is a reason that Visa & Master Card can run Super Bowl ads, it’s because they make a LOT of money. And it’s your money. The cost of NOW is thousands of dollars over the course of your life.
The average American pays over $600,000 in INTEREST over the course of a lifetime. THAT is the price you pay for impatience.
Wait, save and finally start to win with your money. Debt is not your friend.