Debt in modern society is a massive problem. Cheap debt promotes massive debt volume which drives up the price of unproductive assets. We see it all around us: 0% loans on vehicles, 2.5% mortgages, No Interest for 1 Year on furniture, and so on.
Because interest costs are perceived to be low, people have taken on massive debt loads. In some of our major cities, more than a third of all new mortgages are larger than 4.5x gross household income!
Instead of consuming the crap you store around your already full house, it's time to consume your debt so you can realize your dreams that have real value: financial freedom, work flexibility, control of your time...
Debt Is Poverty
While there are some good use for debt, such as purchasing a real investment like a business or another productive asset, generally speaking debt should be avoiding like a disease.
Debt makes you financially lethargic. Repayments can suck up massive portions of monthly income which ultimately prevent you from saving, investing, and actually enjoying your life. Not to mention the stress of trying to keep up with payments that never seem to end.
If you're like a typical Canadian family who earns around $5,000 monthly after taxes, a $2,000 mortgage + $500 car payment + $1,000 credit card bill + $500 line of credit payment can quickly consume a massive portion of your disposable income and make you feel poor even though you're actually earning a decent wage.
However, if you can chew down your debt, you give yourself the opportunity for a fantastic future you could never have when you are bound to monthly payments.
Thanks to historically low interest rates – probably the lowest we'll ever see in our lives – this debt can seem manageable. But what is it really costing you?
Over time I'm willing to bet your perpetual debt treadmill, oversized house, cushy furniture, and piles of worthless junk are actually costing you hundreds of thousands, maybe even a million bucks. That’s real money!
Don't "Manage" Debt, Snarf It Down
Consumer debt is dangerous because it's easy to obtain, always sold as "manageable", and can initially appear so minimal. The problem is the slow cycle of perpetual accumulation.
A little loan here, a little credit there and before long you're struggling under tens of thousands of dollars in accumulated negativity. If you really want to win in life, you have to stop feeding the beast!
The only acceptable form of "debt management" is making serious sacrifices to pay debt off ASAP. And it's not pain-free for your typical couch-loving Canuck.
Work your way down your debt list by the interest rate: credit cards, unsecured personal loans, lines of credit, vehicle loans, student loans, and finally secured debt. You can stop when all that's left is your reasonable, manageable mortgage.
When you have several debts with similar interest rates, just pay off the one that is the smallest first; it's satisfying to knock debts off your pile.
In serious debt situations, or if you have a significant amount of high interest debt, you should consider a consolidation line of credit. With reasonably good credit, you should be able to get a personal LOC at less than 10% interest and use the loan to pay off higher interest debt.
Be careful with consolidating your loans though! The data shows a substantial number of people just keep on accumulating more debt after getting one of these loans. Make sure you are disciplined and focused on aggressively tackling your debt pile. It's not an excuse to lower payments on your debt!
Don't get tempted into consolidation loans with fixed payment terms. Often there are large penalties associated with prepayments on these loans and the total interest costs can actually be much higher over the complete loan term. These are a money maker for the banks!
Finally, don't roll your consumer debt into your mortgage. Paying consumer debt over 25 years is STUPID. You can easily pay thousands in extra interest fees despite the lower interest rate. All consumer debt should always be paid off as fast as possible with no exceptions.
Consumer Debt – Never "Worth It"
Millions of foolish Canadians think nothing of paying $500 a month or more on consumer payments. They continue spending like kings, but "can't afford" to save a few bucks for retirement and expect government programs to do it for them instead.
Here in the Moose world, we know that $500 a month invested for 40 years makes you a liquid investor millionaire churning out $35,000 - $50,000 a year for life.
A nice truck, new clothes, a closet full of shoes, going to the bar or restaurant regularly, granite countertops, and a couple exotic vacations don't equal a million bucks.
The $500 a month you spend today on debt payments for valueless crap is actually costing you $3,000 - $4,000 a month in lost income down the road.
If you don't understand the real cost of your consumer debt, just think about the opportunities you will have without those payments!
According to Numbeo and International Living, $3,000 a month will buy you a fantastic lifestyle in dozens of beautiful countries around the world. Even in Canada it will pay for a comfortable life if you have a paid off house and collect some CPP/OAS.
My next post will be on aggressive spending tactics. Be ruthless!