Debt Free Living Questions part 1

Debt Free Living is about living a debt free life. Judging from some of the questions I’ve been getting lately I’m going to address this issue again.

Question: Why is it important to be totally debt free?
Answer: My last post used an analogy of either you are pregnant or you’re not pregnant. You’re either in debt or you’re not in debt. It is important to be totally debt free so you can eliminate all of the chains binding you.

You can never fully appreciate being free until you are FREE!

Question: Why is a car loan a bad idea?
Answer: Car loans are almost as bad as credit cards in that a car will decline in value the second you drive off the lot (usually 30%). When you finance the car you’re also financing the 30% decline in value and the life of the car is such that the average person never pays off their car loans.

Instead, the 80% (average person) will trade in their car in less than 3 years. If you take an average 5 year car loan and trade it in 3 years later you’ll be upside down on your loan. Many people than have the dealership roll the balance of the loan into the next loan.

The cycle is never ending. It is a loser investment to finance a car.

Question: Is a home mortgage ok?
Answer: The short answer is NO. However, many people make the argument that they are building equity in their home while making payments. That may be true and sometimes it’s completely false.

Currently the housing market has taken a beating. Home values have been declining. If you put no money into your home it’s tempting to walk a way letting the bank take over the home.

If you add up all your payments over the course of 30 years you’ll find you pay for your house 3 to 4 times. If you paid a hundred thousand dollars for your home today you’ll have paid in interest and payments around $300,000 + by the time you pay off your loan.

I realize some people feel they should borrow for a home. I would say, you shouldn’t , however if you do put a large amount of money down on the purchase and fix the rate for 30 years even if it’s higher.

Homes increase in value over time, but can bite you in any 5 – 10 year increment. My dad purchased a home in 1973 for $13,000 and sold it in 1989 for $49,000. By the time he added up all the money he had put into the home for upgrading and modernizing and roofs and interest he had spent he lost money.

Market timing is also a key (and how do you out-guess-the-market?).

My advice is to rent and save and stick with the CASH is King concept. You can never go wrong with cash.

David…