Debt Philosophy

The other day, a friend and I stumbled upon the subject of our conflicting debt philosophies.As you have previously read, my wife and I want to eliminate all of our debts with our extra money, and then begin investing (debt snowball).My friend (we will call him Jose in this story) subscribes to the philosophy of paying down “bad” debt (credit cards and cars) but keeping the “good” debt (school loans and mortgages) with lower interest rates. He can then invest his extra money at a higher interest rate than his mortgage and school loans.Initially, looking at Jose’s philosophy it seems that he will come out on top considering the compound interest he will earn while I am reducing debt.I believe his philosophy is naive because it does not take into consideration the full aspect of money.Money is a very complicated subject.Many people do not understand it and believe that money is simply about numbers (income vs. out go and the higher the numbers you make the higher you end up in the long run).The part most people miss is that money involves emotion and other intangible aspects that are difficult to quantify.

Even though it is difficult to fully understand the emotional aspects of money I will explain what my wife and I will gain from paying off our debt first, then investing.

First, in one of my previous post (Working Freedom) I explained that if you pay off your debt you will be free at work.By being debt free you do not have to stay at a job you hate just because you owe the bank money.Also, it will allow you to be a better employee.One, money issues will not be on your mind which allows you to focus on your work.Two, we all have been in a position where our boss decided to do something detrimental, but you were afraid to point it out because you may get fired.If you were debt free you would be able to tell your boss no and feel confident about your decision.Three, if you were to be fired, as in the previous example, or you choose to leave your job you could take the time to find a company you would enjoy.

Second, my wife and I decided that we would pay off our debt first.There are a few reasons my wife is excited to pay off our debt.One, she knows it will make me happy when our debt is gone.Two, we can have a bigger fun money allowance once our debt is paid off.Three, we will stop paying out tons of money every month that we could spend elsewhere, like European vacations.Four, she will have piece of mind because there will be no chance that our house could be foreclosed.Five, she can show off the nice things she can buy when we have no debt.Six, she sees how people at her job are stupid with money and are always having money fights.

Third, my relationship with my wife has grown while we are working toward our goal to pay off our debt.One, we are setting goals together for the future.This helps us to make sure we are on the same page for our life goals.Two, we are learning about each other and how to work together as a team.Three, we are learning the value of setting goals as a family.Four, we are learning patience so that we do not sacrifice what we want in the long run for what we want now.Five, we are learning to plan ahead so we can prepare for future obstacles.Six, this is more of an example.If Jose wants to buy a car he will take out a loan to buy it because he lacks patience.When he takes out the loan he is paying more on the car than what it is really worth because of the interest on the loan.On the other hand, we will foresee that we want to buy a car, save up for it, save on the interest, and get a better deal because we are paying with cash.

Fourth, my family is in control of our wealth when we have our house paid off rather than hoping the stock market will give a better return.When you are putting money in the stock market you are not in control of the interest rate you will earn.When you pay off your house you own it; you will not freak out about the housing market because you have learned patience and you know the value will go back up.Plus, you save interest when you pay off your mortgage.

Fifth, there is the argument that you will lose a tax break if you do not have a mortgage.Do the math! When you have a mortgage you are paying more money to the bank in interest than you save from a tax break.

Sixth, I calculated what I would have in 40 years if I followed Jose’s debt philosophy and what I would have in 40 years if I stuck to my philosophy.If I kept my mortgage I end up with $5 million; if I pay off my mortgage I end up with $14 million.Over double the money after I pay off my debt.

All the aspects I have described either increase my potential for income and/or control how I spend my money.The takeaway from this is: money is not only numbers it is also emotional; consider all gains and detriments to your family when you choose your debt philosophy. Finally, do the freakin’ math, don’t just listen to what others spew at you, and learn to think for yourself.