Almost everything that our culture tells you about debt is a lie.
The western world is awash in debt, both on a governmental and an individual level. Sadly, heavy debt loads are a problem that grew to prominence in the second half of the 20th century, and today they threaten to ruin individuals, families, corporations and whole nations. Debt is never a good idea, and it’s time to deal with the ugly realities of the subject.
Debt is a form of financial slavery, and it always does more harm than good. Unfortunately, it has become so prevalent in modern society that we have begun to make excuses and rationalizations for it. In fact, a whole cloud of myth surrounds debt, deceiving people into thinking that it’s okay to borrow money. But it’s not okay — the myths are deceptive, and they never stand up against solid financial reasoning.
We’ve confronted each of these myths in separate articles before. Today, though, we’re going to round up the entire culture of debt, and identify the seven most dangerous debt myths that get people into trouble.
Myth #1: Borrowing Increases Buying Power
Many people think that it’s okay to borrow money because it increases their buying power and helps them to purchase things that they wouldn’t be able to without debt. But the truth is that this increased buying power is short lived. Because borrowing money requires you to pay interest over months and years, the amount of money that you lose in interest actually decreases your buying power over the long run. Learn more here.
Myth #2: Credit is a Safety Net
A lot of people first get introduced to debt as a “just in case” way to backstop their checking or savings account, and that has given rise to the myth that credit is a safety net. An increasingly large number of people rely on credit cards or other debt to help them deal with emergencies or unexpected expenses. The problem is that in the long run, debt actually increases the risk in your financial life. Whenever you borrow money, you add a liability to your life. If you have debt and then encounter a job loss or other emergency, you may find yourself unable to make your debt payments and be forced into bankruptcy. Credit is no safety net — it adds risk to your life. Learn more here.
Myth #3: I Can Afford the Payments
Most credit cards and many other kinds of debt offer attractively small monthly payments, which can lead you to believe that it’s okay to borrow as long as you can afford to make the payments every month. The trouble is that these low minimum payments consist mostly of interest, and make a very small dent in the principal balance of what you borrowed. Paying the minimums means that it will take years for you to finally pay off the loan, and over the course of that time the interest payments can match or even exceed what you borrowed in the first place. Low payments are bait on a hook that will hold on to you for years. Learn more here.
Myth #4: Some Debt is “Good Debt”
Sometimes people borrow money to do very noble things — such as pay for education or adoption — that they couldn’t afford to do otherwise. This phenomenon has given rise to the myth of “Good Debt,” as if noble intentions make the borrowing okay. But the truth is that this is a silly idea: No matter how good your intentions are, borrowing money is still dangerous and costly. Many people who take on loans to go to school or adopt a child end up struggling for years or decades to pay the loans back, costing them thousands of dollars in interest and severely limiting their financial freedom. In the end, no debt is good debt. Learn more here.
Myth #5: Beating Debt with Investment
There are a group of people out there that think that they can outsmart debt by using borrowed money to make a profit investing. Some people do this through real estate, and others simply take out cash loans to play in the stock market. And while it’s true that occasionally someone makes enough money off of an investment to offset the costs of borrowing, that’s the exception and not the rule. All investing is risky by nature, and there’s always a chance that you could lose money that you invest. If that money was borrowed, you’re in trouble. In the end, the chance of earning a profit on borrowed money is far outweighed by the risks that debt introduces into your life. Learn more here.
Myth #6: Everybody is Doing It
One of the sneakiest myths in our debt culture is the notion that borrowing money must be okay because everybody else is doing it. It’s true that borrowing has become so commonplace in society that it can appear normal and even safe. What people don’t tell you, though, is that bankruptcy rises as borrowing rises. The fact that many people borrow doesn’t make it safe, or even a good idea. And besides, not everyone is doing it: There’s a whole subculture of people who are committed to living debt free. You probably know some of them. They’re the ones enjoying financial freedom. Learn more here.
Myth #7: It’s Impossible to Live Without Debt
If you grew up in a family that was entrenched in the debt culture, you may be so used to borrowing money that you can’t imagine living without it. Indeed, some people argue that it’s impossible to do big things — like buying a car or going to college — without going into debt. But there’s a difference between difficult and impossible. The truth is that people pay cash for big expenses like cars and education every day, and they’re not necessarily wealthy people. Rather, they’re people who understand the dangers of debt and have done the hard work to save up money to pay for what they want. Living without debt is not impossible. In fact, once you learn to do it, it’s one of the most liberating decisions you’ll ever make. Learn more here.
That’s our list of common debt myths. What are the lies that you’ve believed about debt, and what are the truths that you have found to set you free?
Photo by Gordon Tarpley. Used under Creative Commons License.