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Beware of the Debt Trap

For many of us, we start taking on debt early in our lives. This is especially true in our modern day culture. The drive to have the biggest and the best regardless of your current salary is all too real. But you know what? That’s no way to live your life.

Do you know what Bill Gates pays in interest for his car? Zero dollars.

That’s right. That’s because he purchases a car - using cash - that he can afford.  How many of your purchases are made using some kind of credit? The answer should be zero. If you can afford to pay cash for something, I believe that’s what you should do regardless of the “deal” someone offers you.

Interest Isn’t Worth Your Time - Or Your Money

When you pay someone interest, you’re effectively paying them more than the face value of whatever you’re purchasing. You could be paying that interest back to yourself by investing money, or having it available in your cash flow. One common area I see interest hurting people is when it comes to purchasing a car.

There’s often some kind of a deal attached to purchasing a car using credit - and buyers are led to believe they’ll save money by paying for a car using interest. This is never true. You will always end up paying more than the car is worth. And the worst part? Cars are depreciating assets. When you drive it off the lot, it immediately decreases in value. So, when you purchase a new car using credit, you’re not only paying more than face value for a new car. You’re paying exponentially more than the car is worth two seconds after you sign on the dotted line.

Credit Isn’t Money

You may feel like a high roller when your credit line is increased, or when you start to purchase nice things using credit. This is where people are often confused. Having credit is not the same as having money. Credit can be useful if you’re in a pinch, or if you have an emergency situation that requires more cash than you currently have access to. (Keep in mind: you should be building emergency cash reserves for this to avoid going into debt when you’re in a bad situation).

Many people use credit as if it’s cash they already have. Then they’re surprised when they don’t have the cash to pay off their debt. The truth is: they never had the money to begin with, and now they’re in over their heads and can’t pay back their creditors.

Next time you think that you own something that you’ve purchased with credit, remember: you owe, you don’t own. We want to reverse that narrative so that you always own everything you purchase - not owe money.

But What if You Can’t Afford Something Right Now?

I’m going to say something that many of my readers may not like. If you can’t afford something right now, you need to wait to purchase it. We live in a world of instant gratification. We can order anything online and have it shipped to us in two days or less. We can Google anything we want to know in a matter of seconds. And we’ve become so accustomed to the idea that we can have everything we want exactly when we want it that we forget - we have to save for big purchases. The point of setting goals is to work toward them, not to achieve them immediately.

If you have a big-ticket purchase that you’ve been dreaming about, set a goal. Put money aside every month until you have enough to pay cash - then reward yourself by making the purchase. You’ll feel proud knowing that you waited until you could actually afford what you wanted. You’ll also feel relieved knowing that you didn’t slip into debt just to cave to your need for instant gratification.

And by not giving into the instant gratification gig, you will be in good company.  Warren Buffet, who ranks with Bill Gates in terms of wealth, drives cars for 6 to 8 years and still lives in the same house he bought in Omaha, Nebraska, in 1958 for $31,500.  He says he is happy there, so why spend the money on a new house?  

Debt is a Trap

Many professional athletes with high incomes rack up debt because they’re under the impression that they’ll be able to pay it off at any time. Unfortunately, this isn’t always the case. Life can change at a moment’s notice, and it’s important to keep in mind that even though you have the money to pay off your debt right now, that may not always be the case.

Instead of getting trapped beneath a mountain of debt, play the long game. Use the funds you have coming in now to build a mountain-sized nest egg. Get started investing. Make a plan for how you want to take care of yourself and your loved ones both now and in the future. Need help? I’d love to talk to you about your financial planning options. Together, we can start working toward your incredible, debt-free future.