Debt. Debt is something owed. We’ve all had debt. Whether financial debt or other debt. We have owed something to someone in return for a favor that was done by that person at some point in time. Our natural instinct with all types of debt is to pay it off. This goes for financial debt and non-financial debt. But within that, there are two different motivations to pay off debt. One is fear and one is gratitude. When someone does us a favor, we may decide to return the favor out of gratitude, thus paying off the debt. Why? Because there were no strings attached and the favor was extended out of affinity for the relationship. This occurs in more endearing relationships because we intend to continue the transaction of extending favors back and forth as we strengthen the relationship. This is very natural and very healthy. Then there are non-endearing relationships. Relationships like our mortgage, our credit card, our car loan. These “favors” are extended to us with strings attached. This comes in the form of a financing fee, interest, collateral, and other forms. The debt is being repaid at the point the transaction begins in the form of the profit our lender will realize through the length of our transaction with them. Our motivation to repay this kind of debt is fear. Fear of what the lender could do to us and fear of our ability to produce enough income to keep paying. Never make decisions based on fear. Today I am going to talk about non-endearing, financial debt. I am going to talk about why you should NOT pay it off.
You are an asset. I don’t know if you’ve thought of it this way, but the moment you engage in financial debt of any sort you become an asset to the lender. The borrower is slave to the lender, meaning that you must pay your obligations. Regardless of opinion, when we borrow, the lender will make money and we will be their asset whether we like it or not. Let’s confront that. Now, why would you pay a higher rate of return to a creditor than is required? If Bank of America asks you for $30/mo why, think of yourself as their investment and you cash flow for them $30 every single month. Why on earth would you want to provide them with any more cash flow than they require? This is not your grandmother that loaned you money. There is no endearing relationship here and they do not NEED the extra money. You need to be focused on becoming a better asset for yourself and your family. Not the bank or credit card company. You should only pay the minimum that is required. Period.
Interest does not matter. But what about the interest I pay? That’s the first place our minds go. If we don’t pay the debt off early we will lose out on the interest we can potentially avoid paying. You knew about that well before you borrowed the money and you did not consider the cost of engaging in an interest bearing contract when you borrowed. My point? The time to worry about interest was before you borrowed. Interest does not matter. The reality is that opportunity cost matters more than interest. What I mean by that is you need the money more than the creditor does. Your income is not high enough, you are not saving enough money, and you do not have enough invested. The money you desire to put towards paying your debt off sooner needs to be invested into your ability to make, keep, and multiply your own money. It should not go towards helping your creditors make, keep, and multiply more of their money. Here is reality: You do not pay your bills in interest. You pay your bills in money. You do not have enough money. Therefore, it does not make logical sense to cause yourself to have even less money by giving it to a creditor in exchange for interest. You can’t take your interest savings to Costco and pay for your groceries. You can’t put your interest savings into your bank account. You can’t invest your interest savings. Interest is employed by creditors not as an earnings strategy, but rather as a prod to cause you to pay them more cash, sooner so that you can borrow again. They don’t want your credit maxed out. They want you paying your balance down so they get larger cash influxes and so you borrow more frequently. They will make money either way. Do not play into the scheme of “saving interest”. Save money. Not interest.
When you pay your debt off you will once again be broke. Do you remember why you got into debt? Because you did not have enough money in the bank to pay for something. So you borrowed. How will you get money in the bank? By saving it. So follow my logic here: If you pay off your debt early what will you not be able to do every month? Save. If you don’t save money every month what will you not have in the bank? Money. If you don’t have money in the bank next time you need to borrow something what will you have to do? Borrow. And now you are exactly where you started. What will happen if you keep managing your finances this way? You will never have money and you will always borrow and you will always be trying to pay off debt and you will never build assets. This is the trap of the middle class. You cannot afford to not save money. Break the cycle.
What should you do instead? Pay the minimum possible amount required on all of your debts. Forget about interest. You need to save money, not interest. Collect every free penny you can find in your budget and commit it to a monthly savings plan. Build those savings up. Your first target needs to be $10,000, then $40,000, then $100,000. Why? Because if you invest insignificant amounts of money you will get insignificant investments that pay you insignificant amounts of money. Invest in an asset that produces income. Rinse, wash, repeat. Yes your debt balances will cost more interest, but you will have assets and one day when it makes sense for you those assets will pay off your debt for you and you will still have money in the bank. The cycle will be broken.
This is the type of help I provide to my clients. In our first two meetings on average I am able to save my clients 25% on their life insurance, health insurance, & investment costs, guarantee an increase in their savings rate, and help them secure an 8–10% fixed annual return on their investments. You need to break this cycle and I am the person that has showed up to help you do that. Click here to schedule our first meeting.
Own Your Potential!
Jerry Fetta is a husband, son of Yahweh, Entrepreneur and owner of 5 privately held businesses. Jerry lives in Alaska with his wife and 2 dogs. His no-nonsense approach to business, finances, and life speaks truth and provides clarity to his clients and followers. His personal mission in life is to empower millions of leaders to own their God-given, ultimate potential.