Debtors’ Prison

Isaac Cathey

IT’S BEEN MORE THAN three years since my wife and I paid off the last of our consumer debt. Since then, we’ve enjoyed the benefits of a debt-free life: less stress, no interest payments and a lower cost of living.

While these reasons alone make a strong case for paying off credit card balances, car loans and other consumer debt, the true cost of borrowing goes beyond the obvious. Here are five drawbacks that I wish I’d considered before taking on debt:

1. Borrowing stifles creativity. Using debt to solve financial problems squelches the impetus for innovation. Plato called necessity the mother of invention. If you swear off debt, it forces you to be more creative and look at problems differently. It encourages the cultivation of frugality and do-it-yourself skills—and those provide lifelong benefits.

An example: The alternator on my car failed a few years ago. A trustworthy mechanic quoted the parts and work at more than $600. I’d been making great progress paying down debt and decided not to let this break my momentum. I purchased the car’s Haynes manual and bought a used alternator at a parts exchange. It took me the better part of a Saturday to change the alternator, but I learned a new skill, saved more than $500 and, years later, the car’s still running great.

2. Debt discourages long-term thinking. The way debt is packaged and marketed foments a short-term mindset. Debts are often structured to offer a monthly payment that most people would consider “reasonable.” Sometimes, debt payments are described as “low, easy” weekly payments. I’ve even seen payments quoted in daily amounts on par with pocket change, no doubt so consumers will infer that the amounts are trivial.

Meanwhile, I’ve never seen payment plans expressed in quarterly or annual amounts. When debt isn’t an option, it forces you to ponder the full cost of the item in question. For big-ticket purchases, forking over hard-earned cash is much more psychologically uncomfortable than committing to years of low, easy payments.

3. Financing a lifestyle is self-defeating. Using debt to appear wealthy often accomplishes just the opposite. Most of the possessions that are commonly thought of as status symbols tend to lose value quickly. As my precocious five-year-old is quick to remind me, “The depreciation curve is very steep.” (I think she’s been listening to me.)

What if you purchase these status symbols on credit? It’s a double whammy. The rapid loss of value is further exacerbated by the debt’s interest expense. As a strategy for accumulating wealth, using debt to finance an unaffordable lifestyle accomplishes just the opposite.

4. The long-term cost is huge. Consumer debt has costs that go beyond the interest rate. Consider the opportunity cost of making monthly car payments. According to Experian, the average new car payment is $554 a month. Assuming a 5% rate of return, that same monthly amount, invested over 30 years, would grow to some $450,000.

And that’s not all. These payments must be made with after-tax dollars—dollars that wouldn’t be taxed for years if families instead saved them in tax-deferred retirement accounts. Granted, there’s some value in owning nice things. But given the opportunity cost, I think alternatives deserve careful consideration.

5. Borrowing can become a bad habit. In his book Atomic Habits, James Clear emphasizes the incredible compounding power of consistently making small personal improvements over long periods of time. He suggests that developing habits is more powerful than setting goals. Why? Habits, once formed, become a part of a person’s identity, often manifested in a statement beginning, “I’m the type of person who….”

Unfortunately, bad habits share that same powerful compounding effect. Once a habit of funding lifestyle through debt has been formed, someone may begin identifying as the “type of person who’s always in debt.” Sadly, unless deliberate action is taken to change these habits, they can become someone’s default settings—with all the stress and financial cost that entails.

Don’t get me wrong: Debt can have productive uses, helping people to buy homes and college educations. Clearly, I’d rather go into debt than have my family go hungry. Under certain circumstances, debt may be the only answer. But in many cases, debt is merely convenient—not necessary—and it comes with costs that go far beyond the low, easy monthly payments.

Isaac Cathey is a public sector employee and professional pilot. The bulk of his financial knowledge comes from books by the likes of John Bogle and JL Collins. He spends his free time running, swimming, hiking, camping, biking with his children and doing DIY projects. His previous article was Crash Test.

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