Debt has this double meaning: it can leverage your financial position to buy a house, a car, to invest and so on. Also, it can destroy your financial future if the interest rate or the years to repay are to high.
GrowtoRetire was born out of the necessity of teaching me (and hopefully others) about different paths. Paths with less debt. Therefore with more financial independence.
Why is having less or zero debt a better path? I hope this post gives you the answer to this question.
1. Less Interest = More Income and/or Assets
Let’s imagine that you have a 30-year mortgage for $250,000 at 4.5% interest (average of last weeks). The payments I would have to make will be around $1250. Worst than this, more than half of the monthly payment will be interest. At the end of the loan period, you would have to pay over $200,000 in total interest.
Imagine +$200k in ETFs of stocks or real estate paying dividends in a period of 30 years. A better way to become financially independent if you ask me.
That’s it, a $200k invested in SPY on January, 29 of 1993 would mean today +$2 million. And there is a couple of more years to reach the 30 years.
2. Less Debt = More Health
New research suggests that paying off debt can actually improve how your mind works. It decreases your anxiety and improves your financial decisions.
After the debt has been paid the number of individuals that exhibit anxiety was reduced by 11%. The number of people suffering from “present bias” was reduced by 10%. “Present bias,” favors instant gratification. Thus meaning that individuals improved their impulse control.
In the US, Americans owe (now) over $1.5 trillion in student loan debt, spread out among about 45 million borrowers. In terms of mortgage
3. More Debt = More Risk
You can argue that it’s possible to have this type of risk without debt, but owing money to others is an additional layer of risk.
Financial Independence – The ultimate Goal
I remember an idea attributed to Warren Buffet that is often quoted:
“Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers (…)”
Overall having less debt could improve your liquidity. In times of trouble, cash is king. Debt is pain.
Savings is security in case of health problems, becoming unemployed or to face unexpected events. Thus contributing for your financial independence and in the end for your early retirement.
And you, my reader, have additional reasons to pay off debt? Or particularly agree/disagree with one of these presented? Leave your comment down below.