As mentioned last week, we frequently encounter people who are espousing the benefits of one type debt or another. We hear this so often that we begin to think that using debt is the only reasonable choice. We get so inundated with this type of thinking that we don’t even consider that there might be an alternative.
It’s assumed that to buy a car you need a car payment. The salesman even asks, “what amount of payment can you afford?” People assume that you need a student loan to be a student and that you need a good credit score to get ahead in life.
Well I’m here to challenge this thinking. If you don’t agree with me, that’s fine. My hope, though, is that you will think more carefully about your use of debt. I believe that heavy use of debt is a defining characteristic of middle class America and I believe this is one of the main reasons middle class folks stay middle class.
Here are reasons 5-8 why debt is harmful:
5. With a credit card it’s harder to keep track of your spending
The thing everyone says is that they like using their credit card because it makes it easy to track their spending. The trouble is that this only tracks your past spending and doesn’t help you make decisions about future spending or spending right now. This a lot like driving down the freeway looking through your rear view mirror.
The key difference can be seen when you examine how decisions are made in the moment on spending. If your spouse comes home and says, “I’m wooped. Let’s go out to eat tonight,” how do you decide if you can afford it or not? Most people who use credit cards for all their purchases just go out and worry about affordability later.
Credit card tracking appears to make it easy and tempts people to put their money on auto-pilot, and this is when your money gets out of control. Credit cards are a poor substitute for a good spending plan.Turn off the auto-pilot and “fly the plane” yourself.
Debt is harmful because it makes managing money harder.
6. Debt adds risk
With debt there is always the risk of not being able to pay it back. I know, you have good intentions of paying it back. Most people do, you know. But what happens when you have a medical emergency and you can’t do your job any more?
Joe buys a franchise. It looks like an awesome deal. He gets to work for himself, and he’s just sure that the people in his town would love a new Dutch Bros. coffee shop. So Joe gets a loan against his house to start the franchise.
Unfortunately, Joe didn’t realize that the people in his town had an extreme loyalty to an existing locally owned coffee house. So, after a while, Joe had to close down his franchise. And now Joe not only isn’t going to receive the income from his coffee shop, but Joe still owes on his loan and will likely lose his house in the process.
Debt is harmful because it adds the risk of not being able to pay it back.
7. Debt is a leading cause of divorce
A recent study printed in the New York Times showed that money fights are a predictor of divorce in marriage.
“A new study, by Jeffrey Dew at Utah State University, attempts to quantify that risk. His finding: Couples who reported disagreeing about finance once a week were over 30 percent more likely to get divorced than couples who reported disagreeing about finances a few times a month.”
Of course, couples don’t typically fight over finances when money is managed really well. So, money fights and debt will often come hand in hand.
When couples divorce usually it’s not just one thing that is the clear culprit. Be it disagreements over values, breakdown in trust, or a growing contempt in the relationship, money often is wrapped up and commingled in the issues.
The truth is that if you can work through money disagreements with your spouse, you usually are working through deeper relationship issues as well.
Debt is harmful because it adds angst to marriage relationships.
8. With debt you lose bargaining power
Here in America, we usually pay full price for things. We’re not used to bargaining so much. Though, some of you are experts and negotiating a better deal, and that’s great.
Often when you are going to buy on credit, you lose much of your bargaining position to negotiate a better deal. If you want that “90 days same as cash” offering, you’re not going to be able to negotiate a better deal. There’s cost associated with the financing. However, if you walk in with cash, that’s a whole new deal.
Cash has immediacy. When you pay with cash, they get their money now. They don’t have to wait while the payments trickle in or the 90 day deal comes to a close.
There was a study done where folks where asked if they would chose, $50 in 12 months or $60 in 13 months (I may be misremembering the dollar amounts). Most people picked, $60 in 13 months. But as time when by and they were at month 12, people changed their minds. They switched and said, “give me the $50 now.”
Because cash is “now”, people will prefer your cash now rather than a promise of more later.
I had a friend who paid cash for a house. He under bid the other offer on the house and still got the house. This worked because there were no contingencies and he could close the deal in just two days. Now, that is bargaining power.
Debt is harmful because you miss out on better deals.