When it comes to avoiding the trap that is debt, the first thing many people think of is investing. The average person who’s not familiar with finance will think first of the stock market or buying gold. Both endeavors are pretty risky, but can be profitable. There are different types of investing, by the way. There’s capital appreciation and hedging against inflation. Capital appreciation is when you’re investing to grow your capital base. Hedging against inflation means that you’re investing in hopes that your returns will match the level of inflation. For instance: if inflation is 2% this year, your money will lose 2% of its purchasing power. Chances are, your goal is for your investment to return 2% to make up for your lost purchasing power. To achieve that, many will simply buy short term treasury bonds.
Now, let’s get into the heart of our discussion of debt. But first, take a look at the picture below. After looking at that picture carefully, tell me who do you think is the richest person in the picture.
This may be a proper place at which to define net worth. Net worth is the total monetary value of one’s assets minus their liabilities. IE: $1M Dollars in assets, $300k in debt or liabilities would leave one with a $700k net worth.
It’s apparent that the homeless guy has a higher net worth than everyone else in the picture. The others may have homes, cars, college degrees, etc., but look at the number above their head! That number tells a story. The only one with a positive net worth is the homeless guy! That picture of course doesn’t tell the whole story. You can also add debts such as card debt, student loans, underwater mortgages, etc., placing them deeper in debt than what is being presented. Some could reasonably say that those people definitely have more CASH than the homeless guy. That’s a given BUT as long as you are in debt, you are still in the hole for whatever you owe…including cash.
In our “spend now, pay later” society, we’ve been taught that its okay to buy things we can’t afford. They tell you that by doing that, you’re building credit. You get to put a small portion of money down in order to buy an expensive item and pay it off incrementally. It sounds good in principle, but the problem is that buying items in that manner has become a way of life. On the other hand, because of the rising cost of living and the lack of an increase in wages, some people simply can’t afford the basic necessities, so they’re forced to borrow…in a sense. As mentioned in the previous article, I have no sympathy for people who borrow just to live a lavish lifestyle they can’t afford.
Also mentioned in a previous article was that, ideally, the only people who would borrow were those that could afford to. In my opinion, borrowing when you don’t have the money in the first place (or close to it at least) is asking for trouble. I would also say that those who should utilize credit are those who have plans for using that credit to make even more money. IE: A business or investment of some sort. Borrowing money for useless consumption is how one gets themselves into debt.
There’s a dark side to all of this talk about saving money and that is: our economy can’t function well if the majority of people save their money. Our economy is driven by spending and credit fuels a lot of that spending. Personally, I pay for everything with cash. I don’t even own a credit card and never have. Someone like me would actually be penalized in the current system because I don’t utilize credit (I’ve made the mistakes in the past of taking out notes on cars…but never again). But frankly, I don’t give a fuck…I won’t fall victim to the credit system.
I don’t expect for everyone to pay cash for everything, but relying less on credit and actually saving for what you want to buy will definitely help. To do such a thing takes discipline….the sort of discipline that the average America isn’t willing to develop. Let’s be for real — the average American isn’t willing to give up their luxuries, which they can barely afford as it is, just so they can have money in the bank. They’re perfectly content with working 40 hours a week, living paycheck to paycheck and in many cases, having their paychecks vanish before they even receive it. In turn, having to borrow to support themselves.