Before Dave gets into his 7 Baby Steps to getting out of debt and building wealth, he covers several “debt myths” that most people have been lead to believe are fact. People can’t imagine being without debt… a car without a payment, a house without a mortgage, a student without a loan and credit without a card. Just imagine what you could do with all of that extra income each month! There are a good bit of myths covered in the Total Money Makeover, so I will split them up into two separate posts. So yeah, here we go with the first batch.
Myth: Debt is a tool and should be used to create prosperity.
Truth: Debt adds considerable risk, most often does not bring prosperity and isn’t used by wealthy people as much as we are led to believe. Over time, debt brings on enough risk to offset any advantage that could be gained through leverage of debt.
Dave gives us a great analogy here. Have you ever seen that kid in the store pitching a total fit because he/she “wants something NOW”? Our culture has taught us to be just like this 3-year-old, to live for the NOW… and we can get it, if we are willing to go into debt. Just remember, there is no shortcut to any place worth going.
Another good analogy is this: if you want to be debt free and build wealth, you must find common things, common grounds with those who have made it. If you want to be skinny, study skinny people. If you want to be rich, do what lots of rich people do. When surveyed, 75% of the top 400 richest people from the Forbes 400 said the best way to build wealth is to become and stay debt free. These people lived on less than they made and didn’t buy things unless they had cash!
Myth: If I loan money to a friend or relative, I am helping them.
Truth: If I loan money to a friend or relative, the relationship will be strained or destroyed. Think about it… the only type of relationship that would exist would be where one person is the “master” and one person is the “slave”. Sure, that person might get upset when you decline to loan them money, but they will get over it. Financial debts often ruin life-long friendships and relationships.
Have you ever loaned someone money, only to have them not pay you back on time… or at all? I have. I let a friend borrow $13 in high school and it took him SEVEN months to repay me. He had the money within a week, but he just refused to pay me and would rather spend the money on himself. Not cool.
It is fine if you give money to a friend in need, granted you have the extra money, but loaning them money will only lead to bad things. Don’t do it.
Myth: By co-signing a loan, I am helping a friend or relative.
Truth: Be ready to repay that loan. The bank isn’t stupid; they wanted a co-signer for a reason, and that reason being that there is a very high chance that the person won’t pay. People co-sign on loans simply out of emotion and don’t put any logical thought into it. Much like the previous myth, it will lead to a damaged relationship, damaged credit and money out of your pocket. Don’t do it.
Myth: Cash advance, payday loans, rent-to-own, title pawning and tote-the-note car lots are needed to help lower income people get ahead.
Truth: These rip-off examples of predatory lending are designed to take advantage of low income people and benefit only the owners of these companies making the loan. If you have ever noticed, these places are only found in low-income sections of town… that is because wealthy people aren’t dumb enough to fall for this.
Let’s take a look at some examples. First, the rent-to-own store. People purchase items at these places because they “possibly can’t afford to buy” whatever item it is they want. They look at how much a week is being asked and think “I can afford this”. Wrong!
Rent-to-own places have effective interest rates of over 1,800%! Take the average washer and dryer set, which would cost you $20 per week… for 90 weeks. Do the math, folks, that is $1,800 for the set. If you had saved $20 per week for 10 weeks, you could have bought the scratch-and-dent model off the show floor of that same rent-to-own store for $200, or bought a used set off Craigslist.
Lower income people will remain at the bottom if they fall for these shady practices.
Myth: 90-days same as cash equals using other people’s money for free.
Truth: It is not the same as cash. This is silly marketing that people fall for. We buy things we don’t need, with money we don’t have, to impress people we don’t really like. Think about that… it’s exactly true. Why else do women spend so much money on makeup, plastic surgery, etc.? Why do teens spend so much on name-brand clothes? Why do we buy the latest and greatest tech gadgets? It’s all to impress people.
Here are two reasons that Dave gives to prove that 90-days is NOT the same as cash. First, if you will flash cash in front of a store manager who has a sales quota to meet, you will likely get a discount. If you don’t, go to the competitor.
Second, most people don’t pay off the debt in the allotted time. Nationally, 88% of these types of debt don’t convert and you are charged an interest rate of 24-38%, and they back charge you to the date of purchase.
If that red-faced kid, “I WANT IT, I WANT IT NOW”, rules your life, you will stay broke!
More debt myths busted in my next Dave Ramsey update!
