Principles for Prudent Debt Management
In early 2014, during the months of training for a one-week winter climb in the Rocky Mountains, past successes had led to a complacency that resulted in too few hours in the gym. The corresponding seven pounds of unproductive weight that I was not accustomed to carrying in the mountains, coupled with colder temps and higher winds than were forecast on Day One, produced a horror that nearly cost me my life, one the Lord knows I shall never forget. Artificially easy credit, coupled with artificially low lending rates over the past decade, have produced a similar false confidence in consumers, and is financially as life-threatening as my Rocky Mountain ordeal. Following the fastest rate increases in 40 years, ‘would-be’ wealth producers are wise to consider the following principles for effective debt management.
Always remember debt is financially beneficial only when the borrowed money is invested productively after associative expenses, taxes, and inflation. View every temptation to borrow through this lens.
Never carry consumer debt. This means settling all credit card balances monthly. Use a card only when funds are pre-allocated for payment. Freeze your cards in a block of ice so you can think about the importance of each purchase while it thaws!
Buy certified, pre-owned vehicles with the largest possible down payment, pay the remaining loan off expediently, and drive the vehicle as long as feasible. The cheapest car is almost always the one you already own.
Never refinance a mortgage or home equity loan without proving it’s to your ultimate financial benefit. When refinancing, DO NOT increase the balance or extend loan duration. Realize a lower rate does not alone prove refinancing is beneficial. Never assume an “interest-only” loan.
Become debt free before retiring, and never assume new debt while retired. Giving up earned income while in debt is like a mountaineer who plans to borrow the spare goggles from other climbers in a deadly storm; it’s a request for life-threatening injury!
Avoid margin investing, as investment returns are to be earned, not presumed.
Don’t assume rates will stay low long-term, and as a rule, avoid variable rate loans. Why should you bear the risk of rate increases? If you can only afford a loan using a variable rate, the loan is beyond your means, let it pass.
Manage debt like you would a pet scorpion; keep it to one, cage it carefully, starve it into fragility, and if it hisses at you, exterminate it!
Think about it, Shaun.
“Do not withhold repayment of your debts.” ~Proverbs 3:27
The rich rules over the poor, and the borrower is the slave of the lender.” ~Proverbs 22:7
“Owe no one anything except to love each other.” ~Romans 13:8
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
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