Debt free is the new rich

I have a client named Johnny Filamini. His name ends in a vowel, so you know he’s a good guy.
Mr. Filamini said something profound during our last meeting.

“Debt free is the new rich,” he said.

We were talking about his situation and the back surgery that rocked his world. Because he couldn’t work, he almost lost his business. The good News is he was able to keep his business, although 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, and he was able to squeak by. Mr. Filamini 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 that we should examine our ability to repay them. In effect, 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 there’s nothing wrong with this, one must consider a life of owing money to a lender. In our society however, it seems all the more difficult to live without huge debt.

I’ve never met anyone who has paid off all his debt who has ever 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, and this 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 in 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 have steadily increasing 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.

If you’re like most people, you could clean up your credit card balance within a year if you made 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.

First, you need to understand that you don’t become debt free by consolidating your debt. It is a temporary fix at best. You 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 percent, it would take almost 35 years and cost more than $17,000. However, if you were to add $100 a 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 a 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 by itself doesn’t help. It can work if it’s done in conjunction with applying extra money toward your debt.

Keeping up with the Joneses may be an American pastime, but I’ve got some News for you. The Joneses are in hock up to their eyeballs. Do you really want to emulate them?

No? 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. Remember, being debt free is the new rich.

Steve Scalici is a Certified Financial PlannerTM with Treasure Coast Financial. You can contact him at [email protected]

 

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