Debt is bad! Why this statement is completely wrong! November 3, 2008Posted by shaferfinancial in Uncategorized.
Tags: debt is bad, debt is good, Leverage, no debt
I have found myself in the unenviable position of challenging a theory that not only has reached accepted truth among the masses of people, but is seemingly backed up by current events as well as biblical parables. Probably, what perturbs me the most is the fact that those who perpetuate this myth should know better or do know better. The destruction they bring down on people will be devastating, worse than any of the banks or financial companies that supposedly prey on people.
Here is a post placed on a blog which I will quote anonymously:
Who ever thinks he owns anything that is not paid in full needs to have his brains examined.
Every one is a small participant with the major holder the “lender”. Who is calling the shots.
Moral of the story. Plan to OWN something out right. Borrow in short terms, pay off your loan faaaaaaaaast. Forget the tax benefit hook. Be a captain of you own ship. Period.
And from Dave Ramsey, who I have much respect for:
Myth: Debt is a tool and should be used to help create prosperity.
Truth: Debt is not a tool; it is a method to make banks wealthy, not you.
Debt is dumb. Most normal people are just plain broke because they are in debt up to their eyeballs with no hope of help. If you're in debt then you're a slave, in the sense that you do not have the freedom to use your money to help change your family tree.
Now if you are using credit cards to buy things you can’t afford, of course this is foolish. It doesn’t take a rocket scientist to figure this out. Most people understand this. But the problem isn’t debt, it is spending. You have a spending problem and this is where Dave Ramsey does a real service, getting folks to admit their spending problem. But it has nothing to do with debt.
Now, some facts. Look behind every wealthy person and you will see at some time, usually early on in their wealth building they took on debt. Look at nearly every middle class person and you will see that they use debt, mortgage debt and household debt to purchase big ticket items like automobiles and trucks. Look behind the middle class wealth created and you will see home equity as the largest portion of wealth. How did this wealth get created? Debt, lots of it, a mortgage of at least 80% of the value of the home. And you know what, the vast majority of the middle class has never been forclosed on or gone into bankruptcy. The debt didn’t kill them, hurt them, or make them homeless. No, the only thing the debt did was to create wealth for them.
Ahh, but don’t we as a society have way to much credit card debt? No, 55% of Americans have no credit card debt. Of those who have debt, the median (half above and half below) is $2,200. Less than 9% of those with cc debt have over $9,000 in credit card debt and for this cohort over half have household incomes over $100,000. So there are perhaps as much as 3% who are in credit card purgatory. This is Ramsey and Orman’s real audience. These are the folks who ought to listen to them. Unfortunately, the other 97% of Americans are being subjected to bad advice based on that small minorities spending issues.
Take Ramsey’s and Orman’s advice; pay off all debt and invest in indexed mutual funds, and you are almost guaranteed to have a very frugal retirement, unless you are one of those folks with $250K household income. Let’s say you are making slightly above the median family income, $50,000 and you get your mortgage and all other debt paid off by the time you are 45 and you then save 25% of your income for the next 20 years at twice the average mutual fund investor return (8%). Congratulations, you have saved $618,000. Unfortunately, it is only worth $342,000 at that time because of inflation, which might give you $28,000 income from an annuity which is slightly more than half your present income. Sound like a great retirement? And that is assuming saving 25% over 20 years, without a break, getting twice what the average investor in mutual funds get, average inflation of 3% and you don’t retire into a bear market and you are 100% invested in equities right up to the retirement date. Quite a lot of assumptions.
Think you might want to change the channel you are watching from Suzy Orman to something different? I mean you might sleep well at night without any debt as long as you have income coming in the door, but how well do you sleep at night in your retirement when you know all you are getting in the door is barely enough to survive. All the while taxes, food, insurance, gas, cable, electricity, etc. is marching upward as your meager retirement income stays the same? Shouldn’t you think about how to keep that from happening to you now, while there is time to change? Or, follow the no debt herd into a predictable predicament for which there is no way out? You decide which channel you want to watch!