Debt is a powerful tool which can be used to magnify good things or exponentially multiply misery.
Generally speaking, using debt to buy items that will most likely decrease in value over time is a bad idea.
But debt used to finance the purchase of an asset that pays you an income (such as a rent house, a commercial building or even a business interest that pays a consistent dividend) is different.
Assume Joe has income producing assets worth $1,000,000 (I like round numbers). Further, we’ll assume he receives income from those assets of $100,000 (rents, dividends, interest payments, etc). Let me further assume Joe has $400,000 in debt left against those assets. He’s done the math and he knows that he could take all that $100,000 income the assets produce and pay that debt off in about five years. Five years to freedom, right?
But guess what? Joe’s oldest is about to enter high school. And there will be another soon to follow. After that, they will be gone. Out of the house. And to a degree Joe can only now imagine, out of his day to day life.
Joe has how many years left with them – Four? Five? Six?
What would happen if Joe said to himself, “I think I’ll stretch that debt repayment plan out a little bit. Instead of spending every last dime of the $100,000 my investment assets produce, I’ll use half of it ($50,000) to pay down debt and I’ll use the other half to invest in memories with my family.”
Joe will never get these years back. Ever. What he does with them will now will largely influence how satisfied he is with his family life for years in the future.
What if Joe slowed down the debt repayment for the next five years, invested in his family, then picked it back up again once the kids were up and gone. Well, he would (roughly) extend his journey to debt freedom three extra years.
The problem with me even bringing up this line of thinking is that it will give an already irresponsible person an excuse to continue in his irresponsible ways. So be it. Those people will find an excuse from some quarter. But let me say it anyway – putting expensive vacations on a credit card is not what I’m talking about here. Every family is limited to what they can afford.
So, this is anything but one-size-fits-all advice. In fact, I’m not giving you advice about what specifically to do with respect to your debt.
What I am doing is challenging you to think more deeply about debt than you may ever have before. And to understand that failure to wisely utilize debt in your life may have a cost – a profoundly deep and unrecoverable cost.
Use of debt will cost you interest. Failure to wisely use debt may cost you years and memories you can’t get back.
Make sure you count the cost of debt.
All of it.