Last week we celebrated something that we have been working for all of our lives.

Being Debt Free.

With the burning of our the Mortgage Note on our house, we are finally free.

I don’t like owing anyone anything, particularly something that charges interest. Working to give my hard earned money away to receive nothing in return just doesn’t sit well.

Proverbs 22:7 The rich rules over the poor, and the borrower is the slave of the lender.

But even though I hate debt, I acknowledge that it can be a good thing. It all depends on the return of the debt to whether it is good or bad.

Our first mortgage was to buy the house thirty something years ago. An old run-down farmhouse in Upstate New York, complete with barn. It sits on a decent piece of property on a corner lot with lots of room for kids. We wanted the property to expand our gym – the Muscle Shack – which was housed in a dilapidated garage.

And that’s when we got our second mortgage – to pay for building our gym and making the house livable. It was a very difficult time for us, as we were swimming in debt and I was jumping from job to job. Every extra hour I had I spent working on this Money Pit of a house. The day we were approved for our second mortgage to refinance our debt was a very happy one!

The third mortgage was a line of credit we got on the house in 2005. I used it to buy and renovate a property in town. It put my son and some of his friends to work and I ended up making a nice little profit on the sale.

The fourth mortgage on the house was a refinance to pay off the existing mortgage and buy an income property. The two family I purchased and renovated paid the mortgage and taxes on both my house and the income property. It basically set us up to be “payment free”.

Every loan I took against this house returned substantial financial value. The gym has generated income for 30 years just as the income properties have. We always prioritized spending money on income properties over spending on ourselves. Barb got tired of me saying “The barn makes us money, the house does not.”

Starting out, we were flat broke and working our butts off. Debt stressed us out. We knew we had to get our finances in order if we were ever going to be able to relax.

Having a nice house or new cars was never a priority. It is seen as luxury in this house. Financial freedom was always the goal as it made us feel more secure and free. We’ll live with the old cars and the “dated” cabinets. Another one of my sayings Barb is tired of “I’d rather have $20K in my bank account than in my driveway.”

Being smart about debt is a life lesson so many apparently don’t get, but it’s very simple.

If debt is used to buy assets that make money, it is Good Debt. If it is used on things that lose money – or liabilities – it is Bad Debt.

Homes are generally a good use of debt – to a point. If you can pay less per month to buy a home than rent, that’s a savings. Additionally, a home appreciates in value. Eventually, you can pay off the home and live mortgage free, thereby reducing your expenses.

Buying a fixer-upper can make this equation even better – but not always. Putting sweat-equity into a home can reduce monthly payments on nice home.

All first-time home buyers should buy income property if they can. The net result should be to pay less to own than to rent. Most young couples go the other way – buying homes much more expensive than what they are paying for rent.

Bad debt

Bad debt is anything that is borrowed that does not give a return and then requires you to pay back with interest. Every time you take on bad debt, it digs a bigger hole where you need to make more money to live.

People use emotion to justify debt. I often here “we deserve this” as people justify buying with debt. Actually, you deserve what you can pay cash for. Looking at what you can afford per month rather than how much it’s going to cost in the long run is a recipe for debt enslavement.

Cars are one of the worst forms of debt, as they depreciate quickly. Many people buy the biggest car they can afford payments on when most of us should be driving Honda Fits.

My philosophy is that the only car you can afford is the one you can pay cash for. The exception might be when someone is starting out and has nothing. Even then, it better be a two or three year-old Honda Fit.

It’s all about the balance sheet.

If you want to know where you stand financially, make a balance sheet of assets and liabilities. Someone with a nice house, nice cars and nice furniture appears to be successful, but once you compare it to money owed it might not look so good. Debt is a liability and if you owe money for everything you have, you really have nothing.

But human nature is funny. Living in a nice house with nice cars makes you feel successful. Even if you’re in debt up to your chin, you feel good when you drive in your nice car to your beautiful ticky tacky house in the suburbs.

But it’s a lie.

I regularly fill out a Net Worth spreadsheet to make sure things are going in the right direction. I compare the results from previous times to ensure my Net Worth is increasing. I encourage others to do likewise, but have noticed there is a reluctance. I believe they know the situation is not favorable and don’t want to face it. But it’s not about what you’re worth today as much as it’s about the direction things are going. Your net worth could be negative $20K this year, but if next year it’s a positive 10K, you’ve added $30K!

Poor examples everywhere.

You don’t have to look far to see bad examples of running up debt. The most indebted organization in our area is our own public school. Building project after building project has sunk the school into millions of dollars of debt that taxpayers will have to pay off. One would argue that the money is investing in our children. My position is that it’s good instruction that makes good kids – not big empty buildings.

Our Federal and State governments also set a bad example. The Federal government looks at debt the same way consumers do – instead of looking at the mega trillions they are borrowing, they look at what they can afford per year in debt service. Right now, our government is borrowing just to pay the debt service on our debt. This is what bankruptcies are made of.

And government debt is not good debt. The military complex is not an investment. Wars, bombs and ammunition do not give a financial return. Neither does money spent on Social programs or stimulus checks. Much of the money borrowed and given away recently is ending up overseas. How will this play out?

Infrastructure spending, such as money spent on roads and bridges, is an investment, but don’t be fooled by the label. If any of the money is spent on “free stuff” for the people, it’s bad debt. But what about spending in free education, that surely is investment in our future? Well, yeah, if you’re educating engineers and scientists. But if the money is spent on more lawyers or burger flippers with Master degrees, it’s not an investment.

One of the bad things about government debt is that it is “created out of thin air”. The Federal Reserve Bank prints money and then lends it to the government. This money gets spent into the economy, and thereby increases the amount of money in the economy and decreases its value via inflation.

People are happy when they get their $1400 stimulus check – but not so much when they go to buy lumber for a project and find it’s twice as much as a year ago.

And here’s another very bad thing about government debt – the more inflation there is, the more interest the government will spend on the debt. Interest rates have been held artificially low for years by our friends at the Federal Reserve. Right now, with interest rates on Treasuries averaging about 2%, the government ONLY pays about $500B in interest every year. If it were ever able to normalize – say to 4% – interest would be about $1 trillion.

Debt is addictive like crack or cigarettes. Once you start down the path, it’s hard to stop. The point of no return is when you have to borrow to make interest payments just to get by. Our government is way beyond that point, digging a bigger hole every year. From 2008 until 2019, the government was spending about $1 trillion per year more than it made. In 2020 with the pandemic, it was $5T. In 2021, it’ll be about the same. It’s insane.

Borrowed money needs to be paid back, typically with interest. With personal finances, all debt is settled at death. Everything the deceased possesses in the estate is sold and all debt is paid back. What’s left – the net worth – is left to the kids or other heirs.

With public (government) debt, it’s different. Whatever we borrow today will not be paid back by us. Our children and grandchildren will inherit the debt.

But the “heirs to the kingdom” have been brought up thinking all debt is good. As mentioned, the biggest borrower in our area is our public school – the very institution teaching our kids. It’s hard not thinking debt is good when you see your parents smiling after receiving their government “stimmie” checks.

So as Barb and I celebrate being free of debt, we do so with the full realization that as a nation we are in big trouble. Our being debt-free is more about setting up our kids and their kids to be successful in a system that is being crushed by exploding debt than releasing us from the slavery of debt.

But in the meantime, we’re going to enjoy not making any more mortgage payments!

Ron