Originally published in the News Star and the Shreveport Times on Sunday, September 13, 2015.
Question: I have used debt judiciously to buy investment properties and other income producing assets. Now I am very focused on paying the debt off with the income from the assets so we can be debt free. My wife sees that we have an extra source of income that she would like to use for things like vacations. Our kids will soon be grown and we’ll have a nice income and be financially free if we can just stay the course. Is there something I’m missing here?
Answer: Maybe so. Maybe things like your wife and your children.
Debt is a powerful tool which can be used to magnify good things or exponentially multiply misery.
Farmers use debt to buy seed and other supplies to plant next year’s crop. There may be a serious farmer in north Louisiana who doesn’t use debt, but I haven’t met him.
Business people use debt to acquire manufacturing facilities, buildings or just to use as working capital so they can produce a profit and (hopefully) a valuable ongoing business concern.
But as we all know, debt can also be used to delay hard decisions or mask a lack of personal discipline. Generally speaking, using debt to buy items that will most likely decrease in value over time is a bad idea. Such uses of consumer debt are most often the result of a failure to exercise thrift (i.e., spending less than you earn in order to save for the future).
But debt used to finance the purchase of an asset that pays you an income (such as a rent house, a commercial building or even a business interest that pays a consistent dividend) is different. Here I would counsel you to take off your accountant’s eye shades, put your baseball cap on and think about living.
Let me assume all the income producing assets you own are worth $1,000,000 (I like round numbers). Further, we’ll assume you receive income from those assets of $100,000 (rents, dividends, interest payments, etc). Let me further assume you have $400,000 in debt left against those assets. You’ve done the math and you know that you could take all that $100,000 income the assets produce and pay that debt off in about five years. Five years to freedom, right?
But guess what? Your oldest is about to enter high school. And there will be another soon to follow. After that, they will be gone. Out of the house. And to a degree you can only now imagine, out of your day to day life.
You’ve got how many years left with them – Four? Five? Six?
What would happen if you said to yourself, “I think I’ll stretch that debt repayment plan out a little bit. Instead of spending every last dime of the $100,000 my investment assets produce, I’ll use half of it ($50,000) to pay down debt and I’ll use the other half to invest in memories with my family.”
You’re never going to get these years back. Ever. What you do with them will now will largely influence how satisfied you are with your family life for years in the future.
If you slowed down the debt repayment for the next five years, invested in your family, then picked it back up again once the kids were up and gone, you would (roughly) extend your journey to debt freedom three extra years.
The problem with me even bringing up this line of thinking is that it will give an already irresponsible person an excuse to continue in his irresponsible ways. So be it. Those people will find an excuse from some quarter. But let me say it anyway – putting expensive vacations on a credit card is not what I’m talking about here. Every family is limited to what they can afford.
So this is anything but one-size-fits-all advice. In fact, I’m not giving you advice or even siding with your wife.
What I am doing is challenging you to think more deeply about debt than you may ever have before. And to understand that failure to wisely utilize debt in your life may have a cost – a profoundly deep and unrecoverable cost.
Use of debt will cost you interest. Failure to wisely use debt may cost you years and memories you can’t get back.
Make sure you count the cost of debt.
All of it.
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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.