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Wednesday 21 September 2016

Attacking Debt


Looks like someone had one too many.

Debt - the wine stain on your personal finance carpet, the pimple on your teenage wealth plan's face and the vomit on your budget's clean white shirt. Yuck! 

The fact that you are reading this means you are already showing an above average interest in your personal finance and a willingness to do better, so I suspect I may be preaching to the choir. But still, it must be said - Debt is Bad!

I will say it again - Debt is bad. Very bad. In fact it is even worse than these terrible acronyms I just invented for it:

DEBT = Don't Ever Be Tempted
DEBT = Do Everything Before Taking

D.E.B.T. = Don't Ever Be Tempted
You know those children in the sweet aisle throwing their toys and demanding a chocolate? Well debt is pretty much the adult version of this - "I want x! And I want it now!" (Where x can be a new car, flat screen TV, furniture, a pair of shoes etc.). The instant gratification culture is well entrenched in society and is in fact considered pretty normal. People simply finance cars, and take an HP on TV's -that is just the way it works, right? No! I am very firmly in the other camp, and delayed gratification is certainly something I highly recommend! It is an incredible feeling paying cash for something you have been saving toward.

The way I see it, having debt is like running your investment marathon with a backpack of bricks. The higher the interest rate the heavier the brick. There is no two ways about it, having this backpack is going to slow you down. You may finish the race but you will do poorly, or not finish at all. Rather take the back pack off, reset the clock and then start your race with no excess weight.

Will get stood on....
Now there is one type of brick which is maybe not as bad as the others. Think of it as a lego brick, made of plastic, and very light - it may even be worth carrying. This is a brick that can be used to build a house (see where I am going with this....)

A home loan is a debt which may not be that bad, because generally it is at a much lower interest rate, and generally the asset it is financing will appreciate (and probably above inflation - see this post). Also you may want to have a look at the following article which explains this in more detail - Better Debt and Worse Debt. Of course even a home loan can be worth attacking, and you may also want to check out this post on paying off a home loan versus investing.

One thing is for certain though - If you have any debt other than a home loan, it's time to get physical! You should be prioritising that shit a.s.a.p.! It has got to go! Every last cent should be used to get rid of that backpack of bricks.

Paying off debt fast is a fantastic investment with the following amazing features:
- It is risk free - you effectively get a return equal to the interest rate you are paying
- It is inflation beating - the interest rate you are paying is always above inflation
- It is Tax Free - absolutely no tax due
- Low Cost - No extra monthly fee

And then once the debt is payed off something truly amazing happens - you score a double benefit!
  • Generally you had a debit order coming off your account every month, or you were making manual monthly payments to settle your debt obligations. Suddenly this money is now available to you. And because you were generally getting by without this money, it means you have been living without it, and can therefore continue to do so. So once the debt is paid off there is no reason why you cannot just modify that debit order/monthly payment to instead send the money into some investments/savings. Score!!! 
  • Secondly, since you were being Stealthy and paying extra into your debt every month, this additional payment is now available to you as well. And once again since you were getting by without that money, you can quite easily reallocate it into savings/investments. Score some more!
Admittedly I have taken on debt for my first car. And when you are young and starting out, maybe finance is the only course of action. However this should be a one off event and the goal should be that once any existing debt is paid off, you should never need to go into debt again. Present-self may be very disappointed in Past-self for taking the debt, but trust me Future-self will look back with pride on Present-self for not making the same mistake again!

I am pretty certain everyone reading this already knows that debt is bad and paying it off fast is good. There are a tonne of articles out there covering this. I think the problem with most people is not a lack of understanding or awareness, it is more the lack of desire to do something about it. If you speak to most people, they know that debt is bad, and they will tell you that paying it off quicker is a fantastic idea - so the knowledge is certainly there. But ask them how much extra they are putting towards their debts and the answer is usually 0.

People will read blog posts or articles like this one and will agree with the principles, but then close the page and go back to their normal lives. Maybe it is laziness, or no will power to change, or just contentment in leading a "normal" life with a car loan and a store card or two?

I say we gotta be better than this, and get proactive. Attack the debt! Or as the Canadians would say "Do something eh!"

Blame Canada

Those of you who are sharp would have noticed all the pictures in this post are red, which represents danger. This is no coincidence, it is simply me using subliminal techniques to once again emphasise how bad debt is!

Till next time, Stay Stealthy!
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