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Debt and Bankruptcy Go Together Like A Horse And Carriage

Updated: 02/07/2020 by Financial Samurai 24 Comments

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.

For a personal loan, check out Credible. They are a lending marketplace where lenders compete for your business. It’s free to get a pre-qualified quote in 2 minutes.

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?

Regards,

Sam

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Filed Under: Debt

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

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Comments

  1. Nbmpsd says

    April 8, 2013 at 6:38 am

    Just stumbled across this post & enjoyed reading people’s responses. Cars are my one weekness, and I can totally understand young people stretching to have a nice ride…I’ve never financed a car for all the reasons mentioned above. I honestly believe that there should be a Personal Finance class that you should HAVE to pass before getting a high school diploma, most people are hearing this concept for the first time, and it should be ingrained right from a young age. And btw what’s wrong with black turbos?

    Reply
  2. Mom Equity says

    September 26, 2011 at 9:55 am

    I had a really hard time coming to the decision that I should mortgage my rental property to buy another one. Wanting to buy with cash was my THING. But now with the crazy returns it almost makes no sense NOT to mortgage when mortgage = $250 per month and rent =$1000. Even after expenses I’m cash flowing like crazy. Cars, however, buy a cheap used one for cash. I want a nice car…when I have a million dollars. Love your blog BTW!

    Reply
    • Financial Samurai says

      September 26, 2011 at 10:18 am

      Hi Mom (haha) – Thx! Well, I’ve been toying with the idea to do a cash out refi for the past week now to do just that. Rents are CRAZY right now! So tempting. See the previous post on the subject.

      Reply
  3. Dana says

    September 26, 2011 at 12:04 am

    That’s why I try to live the free debt life. However, sometime, it is inevitable to take the debt for sake of growth.

    Reply
  4. MoneyPerk says

    September 25, 2011 at 7:55 pm

    I loved the last two sentences of this piece! “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.”

    Everybody uses debt at one point or another in life, and personally I think 99% of the people use debt in the wrong direction. Whenever I think of debt, cash flow immediately comes to mind. If I used debt to buy a car, my cash flow significantly decreases because my income will go straight out the window. Not to mention all the other expenses that come with a vehicle.

    I agree you with you Sam, buying a car in cash is the way to go. But if I have $20,000, I wouldn’t just spend it on it car because that would still be denting my cash flow. If I had that kind of cash, I would look for a way to double it, by investing it. Even if my investment only gave my $25,000, that is $5,000 I wouldn’t have if I were to spend it right away.

    Reply
    • Financial Samurai says

      September 25, 2011 at 8:05 pm

      Sounds like you got your head on straight mate! And here’s the thing, one would probably need at least $50,000 in cash to even THINK about plopping $20,000 in cash for a car. Id much rather just buy a $5,000 car and keep it real.

      Reply
      • MoneyPerk says

        September 26, 2011 at 2:08 pm

        Oh I gotcha, I hear ya on that!

        Reply
  5. jhunter says

    September 25, 2011 at 4:41 pm

    What are your thoughts on school loans?

    Reply
    • Financial Samurai says

      September 25, 2011 at 4:52 pm

      Sometimes a necessary evil. It depends on your school and desired occupation. Borrowing $100,000 to attend Chico State to be a teacher is probably a bad idea. Borrow $100,000 to go to Harvard and work in finance, you’re probably OK, but it’s not a guarantee.

      I’d avoid school loans as much as possible, since most people don’t go to the Top 25 schools in the nation by simple math.

      Reply
  6. Jerry says

    September 25, 2011 at 3:11 pm

    I don’t like to finance my car. I like to pay cash because it leads to less for me to have to worry about – just insurance and maintenance.

    Reply
  7. Jonathan says

    September 24, 2011 at 9:18 pm

    Yeah I have never understood why car financing gets a bad rap – obviously many people are irresponsible in their borrowing, but for you and I, there seem to be lots of good reasons to borrow for a car. The “don’t borrow against a depreciating asset” advice always rang hollow to me. What if I had $20,000 and a great private investment opportunity, but I needed a new car? Should I really plunk down all that cash on the car just to honor that advice, vs. get really cheap financing on the car and invest the cash in the strong investment with a much higher return? Heck no!

    Reply
    • Financial Samurai says

      September 24, 2011 at 11:25 pm

      Yes, pay cash, or finance it for cheap if you really want to buy a $20,000 car since you make over $200,000 a year. $20,000 is not a large amount. It’s if you only make $50,000, $100,000 or $150,000 where it’s just absolutely silly to spend $20,000 on a car. People only making this much can’t afford to pay cash, which is why they lease or finance.

      Do share about this great private investment opportunity. Maybe I’ll get it in on it too! Thx, Sam

      Reply
  8. 20's Finances says

    September 24, 2011 at 7:03 pm

    I absolutely agree about the car loans. A good friend of mine still owed about 10K on a relatively new SUV. It was maybe 6-7 years old with just around 100k miles, but the engine literally died out on them. It cost them $5,000 to get a used engine in. They had no choice but to fix it since they owed so much money. If you owe so much money on a car, it literally has you in chains (on top of the depreciating costs that you already mentioned).

    Reply
    • Financial Samurai says

      September 25, 2011 at 12:11 am

      Oops! Yeah, cars really crush people’s finances… especially those who are in their 20’s. Glad you’re on board. It will save you tons of money and pain!

      Reply
    • Ben @ BankAim says

      September 25, 2011 at 3:28 pm

      Very true. I know of someone who couldn’t sell their car for what they needed to get out from under the loan. The car is worth about $10k less than what is still owed and its still a fairly new car. The depreciation of cars really puts anyone with a loan in chains, just like you said. If they sell the car, they still owe more than what they could get for it, so they are stuck with it. Luckily they have a reliable car and can probably run it for many many years.

      Reply
  9. Everyday Tips says

    September 24, 2011 at 2:04 pm

    We have the standard mortgage debt and that is it. Hopefully will be done with that in 5 years, 7 at the most. I hate debt so much. I totally don’t care about making better returns elsewhere, if someone gave me $130k, my mortgage would be gone in a heartbeat.

    Reply
    • Financial Samurai says

      September 25, 2011 at 12:10 am

      Really no temptation in doing a cash out refi and spending/investing that money on anything?

      Reply
      • Everyday Tips says

        September 25, 2011 at 12:40 pm

        While was my site was getting hacked this morning, I was ironically on the phone with ING direct when I saw you replied to my comment. I will be writing about this in an upcoming post, but we are refinancing and taking some cash out. Still plan on paying off in 6 years, but the flexibility I gained is amazing.

        Love low interest rates! (for borrowing… :) )

        Reply
        • Financial Samurai says

          September 25, 2011 at 12:57 pm

          Haha, so we’ve tempted you! Nice! It’s just accounting really. Just don’t blow yourself up with all that extra cash!

          But if you must, bet on BLACK!

          Reply
        • Everyday Tips says

          September 25, 2011 at 1:09 pm

          The temptation started about a week ago when I was going through our finances and thought about how we never have seen such cheap borrowing, and I decided I wanted to roll my HELOC and mortgage all into one payment. Taking out a little extra for some home improvements, and we will be all paid off the month before I turn 50. (Yeah, I am sure you think that is old to have your house paid off…)

          Don’t worry about me blowing the cash, I am wayyyyy too cheap for that. Unless I lose it in some ridiculous bet about Obama getting elected in 2012.

          Reply
  10. Financial Samurai says

    September 24, 2011 at 11:04 am

    It’s not if you can pay for it in cash, earn more than 10x the value of the car a year, and have better use of the funds that will outpace the rate of devaluation of the car.

    Reply
  11. Srinivas says

    September 24, 2011 at 11:00 am

    I think the point you brought up about cars is a great one. When I got out of college my dad thought it was a smart idea for me have a brand new Honda Civic with a $375 monthly payment. Looking back that was one of the dumbest decisions I ever made. I vowed never to buy a brand new car again after that and I’ve been fortunate enough to have my parents give me one of their cars which was fully paid off. But if I had been required to buy a car, I would have absolutely bought a used car. My car serves really only one purpose. It’s basically a mechanism by which I transport surfboards. If lived close enough to the beach, then I would probably even just ride a cruiser there. But when you chase waves you find yourself going all over Southern California because every spot is different everyday. I think debt is a powerful motivator and when I finished grad school and found myself dead broke it compeltely changed my attitude towards buying things I didn’t need. As a result I put away a good amount of cash in my ING direct account and have a relatively substantial rainy day fund.

    Reply
    • Financial Samurai says

      September 25, 2011 at 12:10 am

      Nice one Srini! Debt does have a way of kicking our asses into shape.

      It’s almost a right of passage for any male in America to get a nice car after college and blow all their income. I did it, and millions more will do it after us.

      Hope the surf is treating you well!

      Reply
  12. krantcents says

    September 24, 2011 at 8:28 am

    My debt of choice are mortgages because I am able to leverage my cash to buy an appreciating asset. I generally avoided all other debt except for auto loans. I generally keep my cars for many, many years past repayment so it made sense. I would put my funds to work instead. My prime motivator for avoiding debt was the high interest rate. For me credit cards are a convenience for purchases not an vehicle for overspending.

    Reply

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