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This will probably be one of the more “offending” posts. Everybody has debt… not?

No. Not everybody.

Personally, I do not have any debts. I admit, there was a time, a long time ago where I did take a little debt. But that was because of a confluence of reasons and besides… I was very much jonger then.

There are multiple reasons not to take debt:

Interest

Since interest must be payed on the debt, the total spending power we have in a lifetime is diminished. This is easy to see in an example: Suppose that in our entire life we earn $1,000,000. If we never take any debt at all, we get to spend that million dollars ourselves. If however we take on debt and have to pay $100,000 in interest then, obviously, we can only spend $900,000 ourselves.

You could argue that any debt not repaid when we die should be added to the total earnings in a lifetime. But that would be wrong: banks are not philanthropic institutions, and they know this. Hence they simply increase the interest to compensate for this. This is also why banks will be unwilling to lend anything (or at least ask higher interest) when we get older. Good luck trying to get an unsecured loan when you are 90!

Debt is a problem magnifier

The future is uncertain, while we may have a high income and low cost of living, that situation may be completely different tomorrow. We simply don’t know. Taking on debt means that we are gambling that we will be able to pay off this debt. Failure to pay back can have catastrophic consequences just when we already have problems. Said differently: having debt that you cannot pay off due to circumstances will make the circumstances worse.

While in the best of times debt doesn’t necessarily hurt, in the worst of times debt will make things even worse.

Debt must be serviced

There is one kind of debt that could be considered “not too bad”. That is debt that can be paid off immediately. I.e if we actually have the money to pay off the debt, and this money is indeed available to pay off this debt. In this case debt is unnecessary, but it can be financially advantageous for us. (This was the kind of debt I took when I was younger).

All other kinds of debts have a direct impact on our obligations: usually this means that we have to keep working to service the debt. Having debt will in general take away our freedom to simply stop working for a while. To quit our job, just because we want to. Debt has an enslaving effect. The higher the debt, the stronger this effect. Even having a fully secured debt (mortgage) has an enslaving effect despite that we could “drop off the key’s”. The implications of such a change in lifestyle has the same effect as the debt itself.

The current financial system (sword of Damocles)

This is a big one, though very invisible. Our current financial system is a game of musical chairs. The last few to want to pay back their debt, can’t.

To understand this you have to know how money is created. Money is created by … taking on debt! Yup, money is created when somebody takes out a loan. Any kind of loan. Since debt comes with interest attached, it is impossible to pay back all debt at any time. If for some reason people suddenly get anxious and want to pay back their debt… they will discover that they cannot do so. The money in circulation is insufficient.

We are at all times just one panic away from total financial meltdown. And the only way to ensure that we won’t be a victim in such a scenario is not to have any debt.

Psychological

While we might not be fully aware of the above risk factors, most people have some sense of it through their emotions or mood. Having debt can feel ‘heavy’, it weighs us down. Behavioural economists, psychologists and marketeers alike have found that people are debt averse. Even when we take debt, we never feel ‘free’ when we do. Sure we develop all kinds of rationalisations why taking on the debt is “necessary” or “is ok” or “will be fine”. But back there in that corner of our mind? normal people simply don’t like debts (psychopaths are an exception).

So do yourself a favor: DON’T DO DEBT

Not for a car, not for a study, not for a house, not for a business, not for a wedding…. just don’t.

I saved the best and final reason for last: If you never take on debt, chances are you will come out way ahead of everybody else… because you will have learned the lesson that contributes the most to success in life: we depend on ourself.


Originally posted at: 2016-11-23
Last modified on: 2016-11-23