Personal Finance Rule #1
We’re going to go through a list of personal finance rules that I believe are necessary to get ahead financially. Some of these may not necessarily be in line with what we’re taught generally, but hey, most people are terrible with money, so let’s not get too worried about that. Today is rule #1.
Rule #1 – Don’t borrow money to fund expenses
There are some clear areas here that are pretty much undebatable and others that are very debatable. Let’s start with the areas that are clear.
Tons of people borrow money to fund expenses such as lifestyle (namely credit card debt) and cars (auto loans). Both are terrible decisions financially. Your lifestyle and your automobile you drive are nothing more than expenses. One brings pleasure and one is more of a necessity (but can also bring pleasure), but regardless, they are both expenses.
These expenses should 100% be funded with cash that you have. Using debt means you are paying much more than the actual cost of the expense. You’re paying for the expense and you’re paying the interest on the debt.
Now, let’s get to the gray area: housing.
Unfortunately, housing has gotten a bad reputation. That reputation is that it is an asset. It’s not if it is your residence. You require shelter thus you incur an expense. It’s the same whether or not you rent or own. Wall Street has gone to great lengths to push home ownership as a way to get wealthy, labeled it an “American Dream”, and convinced the public that home ownership is required to make it in life. This idea of the American Dream has nothing but secure decades of continuous cash flows to Wall Street and the financial sector in the name of mortgage payments.
Thankfully, the recent housing crash has reminded people that homes are not guaranteed assets that will only go up in value. It’s a load of crap and it’s been revealed to be so.
Now, I’m saying all this and I have a mortgage. Unfortunately, much of my education came after I got into a house. Does that make me less credible on the subject? You can decide. I can tell you if I knew what I knew now, I would have been renting for several years now.
Does this mean that you should only pay cash for a house? Well, yeah, sort of. It means you should minimize your expenses on your residence as much as possible. If that means paying cash, then that’s what you should do. Seems extreme, no? Maybe it only seems extreme because we’ve been so conditioned to think mortgage debt is a way of life.