Debt – Less Sooner vs. More Later

Debt is a polarizing subject with people and opinions along a spectrum.

Pro-debt people are on the one side. Credit card companies, banks, and lending institutions that make money on debt are firmly on the far side of the spectrum, encouraging borrowing by whomever for whatever they want. It also includes the OPM people who advocate borrowing as leverage. Use “other people’s money,” borrowing at 3-4% to make 8-10%.

Anti-debt folks are on the other end. Debt is dumb, cash is king, and anyone who uses debt is naive, foolish, or both. It’s risky and is the reason the government will collapse and people get divorced. Debt is always bad and should be avoided at all costs.

Most people are probably somewhere in between, caught between two dogmatic ideologies. The more intentional among us wonder if there are exceptions rule or nuances to the worldview. How does it apply to me?

Let’s add some nuance.

(Be sure to listen to the episode, as I’ll lay some groundwork that needs to be established that I would discuss here. There are clear, wise financial principles that the following discussion takes place within, and you must know those principles. )

In keeping with our mission to challenge your view of finances and the money scripts we tell ourselves, I want to give you another paradigm to consider. Here is the principle

Using debt is choosing less sooner over more later.

Woah. That seems like the opposite of what we’ve heard. Isn’t using debt choosing to get more now and less later? I want the TV, shoes, and iPhone now, so I put it on a credit card and pay for it later. I want the brand new car now, but I can’t pay for it, so I finance it. Debt is more now and less later.

That’s short-term thinking. One of the main differences between those who are successful and those who aren’t is their ability to think long term.

In the short term, you do get more now by using consumer debt. But over your lifetime, you are choosing less. When so much of your income goes to spending and interest and not to saving and investing, you end up with much less over your lifetime. And those who save and invest early and often and up with much more later.

Most Americans fall on one side of this spectrum. They save 3% into their 401(k) and spend the rest (partially on interest payments).

But many also fall on the other side. They give up everything for years only to have more than they know what to do with in the end. They forgo experiences and building relationships in exchange for more money.

You can spend all your money and have less later. Or you can save all your money and have more later. My impression is that life satisfaction comes somewhere in the middle.

Financial Planning is the key to finding this balance. Do you really need to save 15% into your 401(k)? Or would 12% in a better investment strategy achieve your goals and free up cash to spend on experiences with the family? How would you know unless you have been doing the planning to find out?

Indeed, some financial planning work has revealed that clients need to save more or work longer. But more often than not, we find they can save less or retire sooner. More is not always better. Planning helps you find the balance.

Tune in to the episode as there is a lot of discussion that only happens in the audio.

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