Sunday, July 29, 2012

Debt is Bondage

I keep seeing commercial where companies looking to entice you to borrow money for vacations and stuff keep talking about, "Why wait?"  Seriously, why wait?  Maybe wait, because you don't have the money for it.  Maybe wait, because you are not entitled to it just by breathing.  Maybe wait, because if you refinance your house and take your equity to pay for a vacation, it will take you years longer to pay off your house.  Maybe wait, because financing your vacation will make it cost hundreds of dollars more.  Maybe wait, because debt is bondage.

Any time you owe someone else money you are in some degree of bondage to them.  You work to pay them.  Some would have you believe that having the tax write off for you mortgage and being able to invest your money at a higher rate than you are paying is a good plan.  I propose that it is gambling.

First, a tax write off is not giving you back all of the interest you paid.  It reduces your income by a certain amount and you don't have to pay tax on that amount of money.  If you pay 10% income tax and pay $2000 in interest on your mortgage you save $200 in taxes by being able to write off your mortgage interest.  You do not save $2,000.  You have a net loss of $1,800.  That is still better than a net loss of $2,000, but a net loss of 0 is better if you can pay that mortgage off.

Second, if you have a 5% mortgage and you think you can invest in something else and earn a better rate of return you are gambling.  Investments that pay over 5% are generally long term and risk based.  If it is stocks or mutual funds they go up and down with the stock market.  If the stock market crashes, so does your investment, thus you could lose money in addition to the 5% you are losing on the mortgage.  Investing in your home by paying off is a guaranteed return of 5%.  It is hard to find a guaranteed return of 5%.

Additionally, if you home is paid off and you lost your job or some other unforeseen financial disaster happens in your life you will not have to worry about losing your home.  What is the value of security?

If you pay your mortgage down as fast as you can, you can invest that house payment in other investments at that time.

Financial institutions are supposedly educated in finances and are experts in this area.  This practice of enticing people with financing luxuries is flat out irresponsible and attacks the less knowledgeable consumer.

Historically people have known banks are not out for our interests but for their own and yet we allow them to trick us into financially unsound practices.

Banks would have us believe debt brings us freedom.  The truth is that debt is bondage.