Today, we’re closing out the series on great money saving tips people hate. If you’ve missed them so far, here’s the list:
This post deals with the much-hated, money saving tip: limit debt.
America’s Debt Problem
Americans are in love with debt. According to NerdWallet, “the average household with any kind of debt owes $134,643, including mortgages.” Mortgages, auto loans, student loans, and credit cards are the main contributors to this debt load.
Why do we love debt? Because we love stuff! We need big houses since that’s what makes us happy. Then we need new cars for the garage. And of course furniture, appliances, electronics, and everything else to fill the house — so get out the credit cards. Oh, and of course we still have debt from that college degree that was just too expensive for the job we got at graduation.
Add it all up and it’s a nightmare costing us a fortune — several hundreds of thousands of dollars in interest over the course of our lives.
The Excuses People Use to Get into Debt
But Americans don’t part with their debt easily. No, we have lots of excuses why debt is good. Here are a few:
- “The only house that met our needs was at this (very high) price so we needed to borrow the maximum amount. It’s not that expensive anyway because we get a tax deduction for the interest.”
- “We have to furnish the house, right? We just can’t leave it empty. Oh, and we need to go to the Caribbean. Oh, and I need a weekly manicure. Credit cards help tide us over until our next paycheck.” (Reality: the credit cards never get fully paid off.)
- “I like to drive new cars. So what if it’s a BMW?”
- “I thought that as long as I got a college degree that things would work out fine no matter how much I borrowed.”
Ugh. What a financial disaster! People are actually rationalizing the debt that’s working to keep them broke.
Better Ways to Deal with the Big Four
Don’t get me wrong. I’m not against spending, but it has to be done in moderation and in proportion to income. For most people this means carrying much lower levels of debt (or even none at all).
Here are some suggestions for dealing with debt in these areas:
- Buy a house you can afford that leaves plenty of cushion in your budget. Then take steps to pay it off in ten years. Even with a tax deduction it’s expensive.
- When you buy a reasonably priced home, all your associated costs pertaining to it go down. This has such a meaningful financial impact that the price you pay for a home actually determines your net worth. So buy carefully.
- If you must buy new cars, buy for reliability and do your best to get a great price. This can be done by having dealers compete for your business.
- Select a college based on its payout — what it costs versus what you’ll earn with the degree. Help yourself on the cost side by doing all you can to save on college expenses.
And for all of these, an old tried and true money principle works like a charm: save in advance and pay cash for as much as you can.
Implement these simple tips and you’ll save yourself a few hundred thousand dollars, which you can then invest to grow your net worth.