Envision a Future Without Debt

STRATEGY #9 TO SURVIVE A DOWN ECONOMY

By Kevin M

In the best of times, borrowing seems to be a sensible way to get the things we want but can’t afford to purchase in full right now, but we’re sure we can tackle later with a predictably increasing income stream.

But when economic fortunes shift into low gear—as they are now—the same debt accumulated during better times can become a heavier burden, even one which is impossible to bear. Other than paying debt down and eventually off completely, there isn’t much we can do about the debt already accumulated. But the Great Recession should be a wake up call to all who might have come to view debt as a traveling companion in life.

In 10 Ways To Survive a Down Economy (published on Christianpf.com June 1) we listed ten strategies to help you deal with the bad economy. Our topic for today, Strategy #9:

”Envision a future without debt, and then pursue it.” Gradually pay down—then pay off—your debt. This includes your mortgage. It should go without saying that lowering your cost of living will be a crucial element in this effort as well. (Are you noticing a pattern?)”

Is that even possible any more?

Stop the madness

Even if you haven’t lost your job in this economy, there are enough people who have that you have effectively been forewarned. Debt is NOT your friend, and if you harbor any notions that it is, now is a stellar time to change that view.

Here are steps you can take to get the situation under control if you now have substantial debt:

  1. Stop taking on new debt—new debt it not the solution for old debt
  2. Cut your living expenses immediately
  3. Build up a savings cushion large enough that you can live without credit
  4. Once you have a chunk of savings, begin paying down your debt with any system you’re comfortable with
  5. If you have debts you can’t pay, contact the lender and attempt to work out a settlement for a reduced payoff; if you have savings, you may be able to get a better settlement with a cash offer.

Once out of debt, stay out of it. If you have to pay for something with a credit card, you can’t afford it. Find a cheaper way. Buy second hand cars and pay cash. If you need financing for college, go to a less expensive school, work your way through and keep any student loans to a bare minimum. Student loans aren’t manna from above, they’re hard debts that will need to be paid back in an uncertain future.

If you buy a house, make the largest down payment possible (20% minimum), keep the term short (15 years) and plan on monthly prepayments to wipe it out sooner. Buy a less expensive home that will enable you to finance under those terms, and if you can’t, you might be better off renting. The practice of perpetual debt has been the undoing of the current housing market.

Save your optimism for your career, your health and your social life, but don’t bet real money that you’ll be able to pay for something over time that you can’t afford now. That thinking has proven to be a sucker bet for too many households right now.

A return to the recent past, or a different kind of future?

For many today, the 1990s are a decade remembered as a time approximating what we might call “normal”, that is, it was a time of economic stability and growth. But often when we think of a time as normal, what we really mean is something more favorable, even desirable, and those were the conditions that prevailed for most of that decade. No one knows whether or not we’ll return to the level of prosperity seen in the 1990s, a decade of low unemployment, low gasoline prices and low interest rates, and what seemed like a certain future. But here’s a clue: the circumstances that produced that gilded decade—the collapse of the Soviet Union and of oil prices in the aftermath of the Gulf War—were events of historic proportions, unlikely to be repeated.

If we’re going to look to the past for clues to the future, we can’t focus our attention on any one time period, especially the more recent ones. The predictable prosperity of the 90s doesn’t in any way invalidate the very different conditions that existed in most of the current decade, or of the 1970s or the Great Depression of the 1930s, another event of historic proportions that molded the spending and savings habits of two generations for decades after.

No one knows what the future holds, so what do we do? Best answer: we err on the side of caution.

What that means, in practical terms, is that we structure our finances on the assumption that the future will see unpleasantness not unlike what’s been experienced in previous times. The idea of taking on debt in that environment—least of all, long term debt—should be something we seek to avoid at all costs. A debt is a fixed cost that will not fall commensurate with a drop in income. For that reason alone, it must be approached with a great deal of caution, especially in times of uncertainty or recognized weakness.

The Payoff: Living without debt

For some, living without debt means living without things that we want that debt can pay for—a form of deprivation in many quarters. But consider a different future, one in which debt doesn’t rule your life…

  1. A debt-free position, combined with low living expenses and a healthy bank account balance means you’re beholden to no one.
  2. Better sleep and more peace of mind.
  3. Not being crushed by a job loss the way it will a more typical household.
  4. You’ll still have bills to pay, but you’ll have fewer of them.
  5. Less money going to pay monthly debts means more money for savings, a problem for many households even in the best of times.
  6. Greater mobility, including the ability to pursue new job and business opportunities that others weighed down by debt can’t consider.
  7. A life that’s more people-centered and less money-centered.
  8. And finally, an unencumbered mind is a productive mind; absent the worry of debt, the ability to tap your creative energies will be more possible than ever.

What ever the future holds, yours will be more positive in everyway if you aren’t carrying a load of debt along with you.

Is that a future worth working toward?

2 Responses to Envision a Future Without Debt

  1. Your point about living debt-free and feeling like it’s deprivation is right. Unfortunately, many of us feel that those things we buy with credit will lead to happiness, but once the initial warm-fuzzies wear off and we’re stuck holding the credit card statement reality sets in and we quickly realize that it’s not what we had hoped for.

  2. You’re so right Jason. So much of debt is psychological. If we can refocus attention away from the things that debt will buy for us, and put it on the incredible advantages we’ll gain from being debt free, we’re probably more than half way there.

    It’s the concept that in order to get rid of a bad habit, you first need to replace it with a good one. In this case, it a matter of replacing short term/feel good thinking with long term/feel even better thinking. That’s why the post concludes with a list of what we’ll have without debt. That needs to be the focus.

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