Something very frustrating has been occurring as I’ve been looking at different sources of information related to my plan to retire early, which at this point is about 14 months away. Whether it’s via blog website or YouTube videos I keep finding the content of influencers who all push the fallacy that good debt can help accelerate your path to wealth. My experience as someone who has gone from $0 to a net worth approaching $2 million (with no debt) is that using debt in an attempt to build wealth will only slow you down from achieving true financial independence. Most of the people whose content I’ve seen identify themselves with the so called FIRE (Financial Independence Retire Early) movement and have not yet achieved the FIRE they so desire.
Now I’m a ways down the road of life from the people whose content I’ve seen recently and I know about the debt pitfalls because I’ve experienced them. Yes, I’ve used debt in my life. I’ve had credit cards. I’ve had car loans. I’ve had mortgages. I’ve tried all the credit card tricks like transferring balances to 0% interest cards for a period of time and charging things so I could get points or miles. To name a couple of tricks that credit card companies use to get people hooked on using their cards. But in the end I realized that the purpose of all debt is to help you buy things you really can’t afford, which helps other people build wealth. But not you! Even mortgages, which I’ve had and think can be useful, can be quite destructive as people often use them to buy houses (or condos) that are too expensive in the hope that they can catch up on payments later or sell the property later when values rise. If they rise. And they don’t always rise as people found out in the 2008-9 housing crash. My experience simply has been that debt causes people to overextend themselves and gets people playing games (like accumulating points, miles or cash back bonuses) that distract from true wealth building.
Now I know that there are some people who will read this and it will cause their heads to explode. They can always use their credit cards to pay for the medical bills to put their heads back together! Thankfully for them there’s no law against being pro-debt as a means of building wealth but I do find it sad because I know from experience that it’s a road people looking for short cuts go down. When I was playing with various kinds of debt I made all sorts of excuses as to why it was a good idea and I remember well that during those years my financial future was as doubtful as it ever was. Raises and bonuses at work helped me to slowly build wealth but I was often frustrated at the pace of growth. Keeping in mind that I wasn’t looking to retire early at age 40 or even 50. I just wanted to make better progress towards a comfortable retirement later in life. The thing was because of my car loan, my credit card balances and my mortgage I felt secure spending too much on everyday things. But the truth was that the $2,000 in my checking account at the start of the month was mostly spoken for to make debt payments later in the month. When you play with debt your bank balance is a mirage that looks nicer than it is. You end up cringing at the point between the last payment of each month and your next paycheck. And you end up going to the credit card when there’s more month left at the end of the money. You end up considering the credit card as your emergency fund. That’s just the way the credit card companies want it.
I’ve learned that building wealth is about getting other people to pay you money. Whether that’s salary, bonuses, 401(k) matches, profit sharing, dividends, capital gains or simple interest. Debt, of all kinds, is about you paying other people money, thereby making those other people wealthy. Those who disagree should stop making their debt payments and see what happens. The other people will get angry and use many, some not so nice, means to collect your money, which by borrowing from them you’ve turned into their money. That’s the thing that the FIRE acolytes who push OPM (Other People’s Money) as a way to wealth fail to realize. When you borrow money you turn your money into their money. They earn the return on investment and you pay for that return on investment. And when you don’t pay them you pay attorneys to fight in court or you get repossessed or foreclosed on. Yes, you can file bankruptcy. Of course, you can’t protect in bankruptcy a car or house or certain kinds of student loans. Even if you can bankrupt your unsecured debt you can be sure that you’ll be paying a bankruptcy attorney thousands of dollars…in cash!
I can tell you that there is a great peace and confidence in looking at your balance sheet and having everything on the asset side. The excess that I have in my budget each month is dedicated to one of two things. Saving or investing. And boy do the numbers grow when the drag of debt payments no longer exists. I think that the thing pushing the FIRE people towards believing in the fallacy of debt as a wealth building tool is driven by one simple human trait. Impatience. I admit that it’s taken me a long time to attain debt free (almost multi) millionaire status. While I think it would have been nice to make a big score when I was younger and have achieved my current situation at 35 or 40, perhaps I would not have appreciated it as much. It’s taken me a good 20 years of patience, numerous ups and downs, and lots of hard work doing my best to make the right decisions for me and my family. There were some pretty hard downs too that I won’t go into. I can say that before the last 20 years I was definitely impatient and that lead me to play the games with debt that the FIRE people believe in. Once I finally settled down for the long haul after being burned by debt then things got better. Not perfect, but better. For example, 18 years ago I purchased a car in cash for the first time ever. A Honda Civic. I still have that car today. It looks and runs well. People joke about my old Civic. I hope they have a good laugh. I think I’m worth more (a lot more) than all the people who joke about it. As much as anything my journey to wealth has been about patience.
So you’re familiar with some of the logic you’re likely to find on the internet praising debt as a wealth building tool I include some of the most popular debt fallacies below along with a very quick rebuttal on my part.
- Fallacy: Credit cards are a safe way to boost your wealth and lifestyle via the earning of points, airline miles and cash back. Rebuttal: Studies have shown conclusively that when people buy things with credit cards they spend more than they would have otherwise, negating the cash back benefit. Points or airline miles are worth pennies each and require exorbitant spending to make them worth anything, thereby busting people’s budgets.
- Fallacy: A Home Equity Line Of Credit (HELOC) is a safe way to tap into your home’s equity so you can boost your investments and improve your retirement lifestyle. Rebuttal: HELOC fees and interest rates (which are higher than mortgage rates and variable) help make the bank wealthy and put your most important asset (your home) at risk. Yes, your property can be foreclosed on if you fail to pay off a HELOC.
- Fallacy: Margin investing is a great way to use leverage to maximize investment returns. Rebuttal: Investing with borrowed money is a risky proposition, requires that you pay your broker interest and incentivizes desperation trading when your bets on the market are wrong. In the end margin trading will lead you to give more money to the brokerage than you’ll receive. And that defeats the ultimate purpose of investing, which is to build wealth.
I know that many people will still read the logic above and seethe with anger at the temerity I have to call out behavior that runs counter to what the financial influencer crowd considers gospel. So be it. As I mentioned at the start I’ve gone from $0 to close to $2 million by avoiding debt focused approaches like the ones I mentioned above. Have they? I know they say they have but how do you know that’s true? The other thing I’ve noticed is that many financial influencers are affiliates for various financial products and courses. You should ask yourself. If these people gained such great wealth using debt driven strategies why do they need to scrap for a few affiliate dollars per conversion? Thing that make you go hmmm. Have patience people. Don’t play the bank’s game. Don’t try to get rich quick. Take things slow and steady for the long run. I know that you’ll be glad that you did. Happy wealth building!
In The Midst Of A Journey 