Debt and bankruptcy are two words most people frown upon. After all, debt is usually the cause of bankruptcy followed by an excuse of a lack of income. I look at debt as a key motivator. Debt is something that has driven me to work harder. Without debt, I would ironically feel a little empty making money because it doesn’t take much to make me happy. Before buying rental properties 10 years ago, I sometimes questioned the point of working one’s entire life away. It felt pointless logging onto a computer screen just to see your savings go up.
When you are single, you really don’t need that much money to survive. Even in big cities like San Francisco, Manhattan, London, and Tokyo, $45,000 is enough to live a happy life as a single person. There’s only so many fancy meals you can eat a year before you start getting sick of eating out. Your Macbook and gigantic big screen LED TV should last you at least 4 years. Meanwhile, the ladies love guys with bus passes since it shows that we are enviro-friendly and keep it real! A black Porsche 911 Turbo is so 2007.
So how does one go from a happy life to utter financial ruin? Getting obnoxiously way over our heads in debt, that’s what.
BE CAREFUL WITH DEBT, IT MAY GET YOU DRUNK
If you were able to live 80 years on 5X what you really could afford thanks to debt, and then die, you win! Who is going to collect your debt once you are dead? Nobody, unless they send the Ghost Busters to hunt you down. The problem is, some folks don’t calculate carefully enough how much debt they can take before they do die. As a result, bankruptcy is often a way out where you hide from your creditors, and ruin your credit score for a nice 7 years. I guess you could go into debt consolidation as well and eek your way out one dollar at a time. But, it’s better to not have to do so in the first place.
Debt allows us to live a little better than we otherwise could. The most common forms of debt are mortgages and auto loans. I didn’t have the money to pay cash for a house in San Francisco. When I first purchased my rental, I was living beyond my “cash buying means” by borrowing 75% of the value of the home. Seven years later, I had the cash to pay down my entire mortgage, but with the price of money continuing to fall to such dirt cheap levels, I’d rather invest elsewhere and/or keep liquid.
I’ve never understood the concept of taking out an auto loan to buy a guaranteed depreciating asset. If you can’t pay cash for the car, or are spending more than 10% of your gross income on the initial purchase price of a car, you can’t comfortably afford it. The difference between an automobile and a house is that at least a house has a chance to appreciate. A house is also providing you a tax break and a necessity called shelter. Automobiles could really be the #1 wealth destructor for young folks.
Sometimes you might have such high conviction on a particular stock or bond that you go in debt to buy more than the cash value in your account. That’s called going on margin. It’s a very risky proposition because when you buy stocks or bonds, you are at the mercy of other people (management) and the perniciousness of the markets. There’s a reason why the majority of actively manged funds underperform their index. What makes you think you can outperform in the long run? You can get lucky in the short run, but tough to say after several more trades.
DELUSIONS, BAD LUCK AND GREED
If you have no debt, the chances of you going bankrupt is small. Debt and bankruptcy are generally intertwined. You might borrow too much for your business which ultimately loses you a ton of money. You might have decided to go on margin and buy stocks at the end of 2007. Or you might have gotten greedy and bought multiple properties with an income level that didn’t support . Whatever the case may be, just be careful with debt. It can be used to enrich your life and live happily beyond your means. Or, debt can be used to destroy your entire financial well being.
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Readers, have you ever gone too much into debt? Have you ever filed for bankruptcy, or thought hard about bankruptcy as your only way out?