By CPA SAM
What’s Your Motive?
Each day, we are assaulted with news stories about the level of debt Americans hold both in government and personally. Still others trumpet the fact that Americans are actually reducing their debt levels. Others are more cynical stating that debt levels are declining because of higher defaults. No one really knows of course what is going on. However, these are all macroeconomic statistics. Today, let’s take a look at you specifically. Are YOU trying to reduce your debt load and what is your motive?
In pure economic terms, debt is more acceptable in certain cases when inflation is present or the economy is growing. During times of inflation, the real value of the debt you hold is being paid back in dollars that continue to decrease in value making the overall economic cost lower to the purchaser. That is good for the debtor but really bad for the debt holder. During times of economic growth, businesses can use debt as leverage to prop up their earnings. As everyone knows, we are now in a much different time. The economy is not growing as quickly as before. Businesses and individuals who took on all that debt now have the distinct pleasure of paying it all back or defaulting.
Which brings me to my question. Why are you paying off debt? Is it simply to put yourself in a better position to borrow again when times improve? This reasoning got us into the current housing mess. We’ll buy a house now and it will increase in value and we’ll sell it and make more money and buy a bigger house…. and repeat multiple times. A better way of thinking is that your debt reduction plan can give you flexibility in the future regardless of what happens. This could lead to a more stress-free life. If you look at the fixed payments required to service your credit card debt, auto loans and lines of credit, you’ll see that you are essentially locked into long-term slavery. Think of the stress if anything abnormal happens to upset your servicing of all this debt.
It takes so long to clear the debt mess, that it would be a shame to simply dive back into it in the next economic boom cycle. What about this scenario?
- Your only payment is towards your mortgage.
- You have normal utility bills each month.
- You pay cash for everything.
- You have a savings account that contains 6 months of living expenses.
- You have life, short-term disability and long-term care insurance.
- You live within your means.
Can you see the difference in the amount of stress? Incidentally, the latter scenario is recommended by most financial consultants. There are no short cuts to this plan. You simply make sacrifices and pay back all the debt accumulated from years of overspending. There is a very pleasant side effect of cutting back on the “fluff” that we all think we need to make it in every day life. Suddenly, meals at home with the family, game nights with friends, and quiet time with your spouse become a bigger part of your life. If materialistic (selfish) thinking invaded your life to get you into debt, changing that thinking to spending time with others (giving) is a benefit of getting back out of it.
Tags: Credit Cards, debt, loans, materialism, mortgage, motives, payments, spending, stress
