By reading this title, you must think: “man, this guy has guts! He writes about getting out of the rat race and then, he’s telling us that debt is a good thing”. Well… I must admit that at first glance, I don’t make much sense. The whole purpose of reaching financial independence is to generate enough cash flow to sustain your lifestyle. Therefore, the less debt you have, the easier it is to reach financial independence. So tell me, how come borrowing is one of the best moves you could ever make?
Why Do You Fear Debt?
I’ve been thinking about why people are so afraid of debt. Here are the possible reasons I have found so far:
a) Educational background (we have been told by our parents, by school and by the Church that debt is evil and that we should always spend within our means).
b) Financial Gurus (most “great financial gurus” are literally preaching a frugal lifestyle and to avoid debt at all cost even if it means using half a tissue paper)
c) Fear of losing (this is more understandable: if you have too much debt, you could eventually default and lose your house/car/lifestyle. Nobody wants that)
d) Hate to pay interest (that is another good point: when you borrow money, it always costs more to pay it back than paying cash in the first place. Interest sucks!)
I might have forgotten one or two more reasons why people fear debt but in general, you probably fall into one of these 4 categories. When you think about it, they are not dumb reasons. In fact, some of them are easily defendable points. In front of this info, most people would agree that having debt is a bad thing and someone that is debt free is to be considered “rich”.
Well, I completely disagree with that. Debt can be so useful that if you are trying to pay them off ASAP, you are missing something.
What is the worst that can happen?
If you have too much debt, the very worst thing that can happen is going bankrupt. This is the worst case scenario; losing everything. I might have a different point of view on debt because I have a different background than most people. At the age of 14, my parents went bankrupt. It is important to say that, back in the 90’s, my dad was making over 100K already. My parents were spending their money as it was coming in. While there was lots of money coming in, there was lots of money going out! When my dad lost his contract, it took only 3 months until there was no money left and had to declare bankruptcy. We lost our big house, big cars, no more vacations, we lost everything… in fact, I even remember my mom looking for spare change under the cushions of the couch to buy a pint of milk at one point!
However, losing everything is not as bad as it seems. It sucks big time but you just get over it. You learn to live with less money in your pockets and you start working hard again. Surprisingly, 4 years later, my parents had started a new company and were making even more money than back in the 90s! You couldn’t tell they went bankrupt and had lost everything a few years back!
What have I learned from this?
I’ve learned 2 things from going bankrupt as a teenager:
#1 don’t overspend and make sure you have a backup plan (I have my budget under control and I can always rely on my online company to pay my bills if I lose my job)
#2 losing everything is not that bad (so I don’t have to fear debt)
Now, it’s not because I don’t fear debt that I should go to the bank and fill my pockets with loans! In fact, one should only borrow to build assets and avoid consumption related debt. For example, don’t finance your vacation . Make sure you have a budget for it!
Where I’m a bit different than others is that I always calculate where my money will generate the most benefits. Then, since my mortgage is at 2% and I can easily generate more than a 2% yield, I invest in the stock market and my company. Therefore, instead of focusing on paying down my debt, I think I should focus on creating more assets.
Over the past 3 years, I have noticed that my spending habits have increased significantly. Unfortunately, not all my debts and expenses are related to creating assets. I have also increased my lifestyle a lot. This is why I am now trying to pay down my debt as I consider that if anything happens right now, I will definitely run into a tough time even if I can count on my online company to cope with my salary loss. My other goal is to drop my debts to eventually give me the option of quitting my day job. I really like what I do right now but just having the option possible would make my day!
Are you afraid of debt? Do you sleep well at night? As long as my interest rate is low, I do!
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