I have a client named Johnny Filamini. His name ends in a vowel, so you know he’s a good guy. He said something to me during our last meeting that I thought was so profound. He said “debt free is the new rich.”
We were talking about how his back surgery had rocked his world. Because he couldn’t work, he almost lost his business. The good news is he was able to keep his business, albeit barely. He said the only reason he was able to survive during those three years is that he didn’t have any debt other than his mortgage, and even that was relatively mild. His disability insurance covered his basic expenses, so he was able to squeak by. Johnny learned through experience how being debt free can actually make you feel “rich.”
Proverbs 22:7 says, “Just as the rich rule the poor, so the borrower is servant to the lender.” This verse is not saying that we are never to take on loans, but it is saying we should examine our ability to repay these loans. Because you will be a slave to these lenders until your debts are paid. In our culture, it seems perfectly normal to take on huge house, car and school debts. While nothing is wrong with this, one must consider a life of owing money to a lender.
I’ve never met anyone who has paid off all his debt and said, “I wish I hadn’t paid off my debt.” On the other hand, I’ve never met anyone with debt who says, “I love being in debt.” Close your eyes and picture a life without any debt: no mortgage payments, credit card bills or auto loans. In today's shaky job market, the image holds particular appeal – even though it may seem impossible.
On a national level, Americans are incurring more debt and saving less than ever. This sadly occurred during an economic boom. The average U.S. household carries $8,523 in credit card debt, according to Cardweb.com, and the savings rate is at a historic low - around 1 percent, according to Standard and Poor's. If we’ve gotten into this much trouble during a good economic period, it will only get worse as we enter into tougher economic times.
When you want something, it's better to save for it than to go into debt to have it. I know that’s not very “American” but if being debt free is wrong, I don’t want to be right. These days, there's always someone dangling new keys in front of your face or offering you vacation package deals. But if you put a $3,000 to $5,000 vacation deal on an 18 percent interest rate credit card, that “unforgettable” vacation may cost you $10,000 to $17,000 by the time you're done paying it off. Then it will be unforgettable for the wrong reason.
If you're spending more than you earn, you will always be spending money you don't have. That means you will always be steadily increasing your debt. Consequently, your credit card debt will continue to control your life. Now it just makes sense, if you continue on this path, you're doomed to hit a dead end.
Chances are, if you made it this far in the article, you’re looking for some answers. Like me, I’m sure your e-mail is clogged with offers of "easy" ways to get out of debt. They promise to rescue us from our reckless spending and to cut our monthly payments by 50 to 75 percent. If only it were so easy.
But if you're like most people, you could clean up your credit card balance within a year if you make it a priority. And you should. Why throw away precious money on interest every month? There are plenty of other good things you can spend your money on. How do you clean up your credit card balance?
You need to understand that you don’t become debt-free by consolidating your debt. It is a temporary fix at best. You really pay off your debt by paying more than the minimum payments. For example, if you have a credit card balance of $5,000 and you pay the minimum payment each month and your interest rate is 18%, it would take almost 35 years and cost over $17,000. However, if you were to add $100/month towards your payment, you would pay the credit card off in 32 months (compared to 35 years) and it would only cost you about $6,100. If you pay an extra $500/month, you would be paid off in about 9 months at a cost of about $5,400. As you can see, paying extra towards your debt is the key. Consolidating debt only works if it’s done in conjunction with applying extra money towards your debts.
Keeping up with the Jones’ may be an American pastime, but I’ve got some news: the Jones’ are in hock up to their eyeballs. Do you really want to emulate them? Then take a good look at what you’re spending your money on. After all, getting out of debt is hard work. Don’t make it harder on yourself by spending money on things you don’t need. And remember: being free from debt is the new rich.
Steve Scalici, CFP® is the Senior Vice President of Treasure Coast Financial, located in South Florida. You can contact Steve at email@example.com or 772-600-1053. Steve is a registered representative of INVEST Financial Corporation. The opinions expressed in this article are those of the author and not necessarily those of INVEST Financial Corporation.