I'd wager that most of the readers of personal finance blogs are already avoiding consumer debt. Most of us are avoiding or actively reducing our credit card & student loan debts, and are realizing the financial and psychological benefits of this approach. It's common sense to avoid paying interest and, yeah, it feels good to pay off debts. So why write about debt at all?
[I]f a major purchase thrusts us further into debt, the thrill of the acquisition will be powerfully outweighed by the strain of the indebtedness....Unless we are taking out the loans to pay the electricity bill or save our child's life, the costs of overspending and indebtedness hugely outweigh the benefits of even the most alluring purchase.
There is one kind of debt that seems to not only be accepted (and championed) in popular culture, but also among personal finance gurus: the home mortgage. The popular wisdom today is that since rates are very low, and since an investor is likely to earn more on his investments than he is being charged for his mortgage, and home prices are rising, it makes sense to leverage a mortgage and keep it around, rather than pay it off or to save up to purchase a home outright. I can't argue with the math. Borrowing at 4% and making 7% in the market makes good financial sense. And a mortgage allows you to buy a much more expensive home than your cash reserves could buy you at this moment. Right now we could only buy a very modest, inexpensive home outright without touching our retirement accounts; but we can easily buy a home that costs twice as much while only using a fraction of our cash reserves if we take out a loan. And there's the rub: a mortgage allows a consumer to purchase much more house than is prudent, carrying the risk (and in some cities, the likelihood) of becoming house poor. Again, from The Myths of Happiness:
Living in a bigger house with a bigger backyard gives us pleasure, but this pleasure diminishes over time until we barely notice the square-footage or the updated bathrooms. More critical is the fact that our pleasure from the house can't come close to matching the pain and worry of eking out monthly mortgage payments....As I wrote last month, we are looking to purchase a rental home. The timing seems great, since we are on the cusp of paying off the mortgage on our primary residence and even with a second house, we would only have to pay one mortgage at a time. And, hey, the renter would be the one actually paying our mortgage and putting a couple bucks in our pocket every month. What's not to like?
Well, for one, I don't like mowing grass or the thought of someone treating my six figure investment like a Cancun hotel room on spring break. Sure, I could hire someone to manage the property and mow the lawn and fix the toilet, but that means more bills. The mortgage itself is just a bill. And, you know, I've never really liked paying bills.
We are mere months away from seeing what it feels like to have absolutely no debt. If we didn't need the line of credit in order to borrow more money (ironic, no?), we could pay off the mortgage tomorrow. I think it's worth seeing what it feels like living without any debt before taking on six figures more of it. One last time, from Lyubormirsky:
Happiness is not just about feeling good -- it's also about not feeling bad. Because diminishing negative experiences (like the worry associated with debt) brings a three-to fivefold greater return on happiness than creating positive experiences, the wise course of action -- and step one to embark on any strategy to enjoy living with less -- is to reduce or eliminate debt before committing our money to any nonessential services or goods.
With this in mind, we are putting the rental home search on hold for the moment and are considering simply saving to purchase a home outright. Maybe that will be a rental home, maybe it will be our next primary residence four years down the line. Yes, there are probably opportunity costs with this approach, since a lot of these savings would sit in cash. Yes, we might be missing out on low rates and, in some cities, low property values. But we're also missing out on the negative effects of debt and gaining the rare opportunity (and happiness) of being completely debt free for the first time since, well, we were teenagers. I'm betting that would feel pretty damn good.