One of the things that has always amazed me is our societies reliance on credit: loans, credit cards, mortgages and the like. On would think that upon reaching a position of affluence the thing to do would be to avoid borrowing anything from anyone.
I mean, who wouldn’t want the opportunity to say that they were truly “debt free”?
One of the first things … no, the first thing we did when we received our first “installment” of what I’ve been calling the “stock option lottery” was to pay off a car loan. It was a personal loan from my parents, and they didn’t really even want or expect it to be paid off, but we insisted.
One debt down. And it felt pretty good.
That left our house as our only outstanding debt.
Now, a mortgage isn’t as obvious a decision as you might think. While a car loan or a credit card balance is an obvious drain on your wealth over time, mortgages aren’t quite as simple. Because of the comparatively lower interest rates and the tax advantages that the U.S. tax laws give to home mortgage interest payments … well, it gets a little complicated.
In fact, many financial advisers (and remember, that’s not me) will tell you that you’ll make slightly more money in the long run if you actually keep your mortgage for some time, and invest the funds that you might have used to pay it off. It’s a complicated calculation that involves the interest rate on your mortgage, how long you’ve been paying on it, your tax bracket, and the return you can get if you invest those funds instead.
We didn’t do that.
Oh, we did the calculations and got a handle on what the difference would be. But we also factored in things like our tolerance for risk and our own long term goals.
We paid off the house.
It felt great.
We were 100% truly debt free.
And when time came to purchase our next home, we paid cash. That felt great.
We remain debt free. We don’t purchase cars very often, but when we do, we simply pay for them. I carry four credit cards, but I always pay off the entire balance every month.
So what does this all mean for you?
Simply this: be aware of your debts. Consider whether paying them off makes financial or personal sense for you. Now that you have net worth one of your goals, hopefully, will be to manage it in such a way to not only have it last, but also to use it wisely.
Many would consider eliminating interest-bearing debt one of the wisest first moves you could make.
As the title of the article says, “Neither a borrower … be”.
I’ll address the second half of that famous quote in the next essay.