By Gary, on August 25th, 2010
What is the opposite of wealth and keeps you from wealth? Debt!
Unlike the recent posts by Tom on Good Calories, Bad Calories by Gary Taubes, there is Bad Debt and Not So Bad Debt. All debt reduces the ability to build wealth – why?
Well, let us revisit one of my earlier posts: “Investing: Part A – ‘Your Money has a Job in a Financial Institution!’” In this post I describe the term Discretionary Income.
Discretionary income is the income after subtracting taxes and normal expenses (such as six-months of saving, housing, utilities, insurance, credit card and other loan payments, medical, education, transportation, maintenance, child support, inflation, food, entertainment, and everything it costs you to maintain your standard of living). Unless you are comfortable with cutting costs so you can invest and grow your wealth, I do not recommend setting yourself up to quit investing. Therefore, make sure you are using discretionary income to invest.
Notice in the excerpt that some of the items that reduce your Discretionary Income and therefore your ability to invest are debts: “credit card and other loan payments”.
Some say that having an excellent credit rating is a good thing. It is a good thing if you want to go into debt. It means nothing if you are building your wealth.
Debt is addictive. Debt is seductive. Debt is inviting. Debt is . . .
Common Example: John and Jane want two new cars but they only have $4000 saved up and the cars they want cost $28,000 each for a total of $56,000. They have a very good credit rating and the lending institution lends them the money at an attractive interest rate. They drive away in their new cars feeling on top of the world and “wealthy”.
In reality, they just spent their savings, $4000, and they just went into debt for five years. Their Discretionary Income just plummeted by $1200 per month (their combined monthly payments to the lender) for five years: $72,000. So, after five years their cars will be worth about $24,000, they will have spent $76,000 to get the cars, and their savings will still be $0 because they couldn’t afford to save during the time of the car payments.
The car loans caused their wealth building to stagnate and their net worth to go down. I doubt that the feeling of being on top of the world was worth it.
This also goes for new boats, televisions, furniture, more stuff, vacations, student loans, etc. You get the point.
So far we are talking about personal debt – the debt you can control. But, there is one debt you can’t control – well not by yourself. That debt is our national debt.
Our founding fathers set up our government as a Republic. Our leaders, starting with Woodrow Wilson, have taken it upon themselves to leave the principles of our Republic and embrace the principles of an Empire. This has led to a massive national debt. “So what,” they say, “we are just loaning money to ourselves.” No big deal, right? Wrong, nor are we in debt to just ourselves, but other countries own a major part of our debt, thus exposing us, our children, our grandchildren, our great grandchildren and so on to a large personal debt. Currently, anyone living, man woman and child in this country, has a whopping personal debt ranging, caused by our national debt, in the $200,000 range due to our governmental policies and actions.
This has a huge effect on your wealth building abilities. Just think: You are starting with a large debt the minute you are born. That is a lot of debt to overcome – not impossible – but a lot.
A great book to read on this subject is “The New Empire of Debt, The Rise and Fall of an Epic Financial Bubble”, Second Edition by William Bonner and Addison Wiggin.
Personal debt is controllable and my next post will be more on how to approach zero debt so you can build your wealth forever.
Until next time.