About Debt
Being in debt is expensive… at least it’s more expensive than being debt free. Personally, there are three main reasons why I would want to stay of debt:
- Being in debt costs money. Interest payments on debt is lost money, as it also could have been invested.
- Debt is a liability, and it can become dangerous when I can’t pay for it. It is an extra risk to avoid.
- Having to pay my debt means that a lesser proportion of my monthly income is available; it means I can save less, my net worth will grow slower, and I bear the risk of needing to take another loan if something unexpectedly happens which I need to have fixed immediately.
I know quite a lot of people who are in debt continuously. They have good and regular incomes, but their urge to lead a specific living standard is so great, that they are prepared to take loans in order to buy the best TV, a new Playstation, or a luxurious car. In effect, their monthly income is being eaten up, and they need additional loans if they want to make a purchase, which is not calculated in their day-to-day budget. At the same time, the amount of individual bankruptcies has increased during the past few years.
I have chosen to keep my debt to an absolute minimum. I am simply not prepared to pay the interest, I am not prepared to have my income eaten up by monthly payments. However, I do believe that debt has a certain benefit in a limited number of cases. These are my personal exceptions for taking a loan:
- I am prepared to take a mortgage when buying real estate. The long term benefit of owning real estate is greater than paying monthly rent, and I am ready to take a mortgage when I am ready to settle down.
- I am prepared to take a loan for something, that will bring me more money than the periodical debt payments.
- I am prepared to take a loan for educational purposes (e.g. an MBA), since this will increase my competitiveness on the employment market and increase my chanced for a higher pay.
