How to Avoid Debt Slavery By Anonymous
Introduction I am very unusual. I have almost no debt (I still owe $8,000 on my house—but I have only been a homeowner for 2 years). I have no car loans or credit card balances. Our expenses our low, low, so I can work at a job that I actually enjoy doing. My job is not high-stress, nor do we have to worry about our bills. My w ife can stay home to raise our family, because no banker overlord forces us to do otherwise. And that is despite the fact that three years before before this writing, I had only $300 to my name. But at least my lack of money was matched by lack of debt. So yes, we can all live debt-free if we really try. It takes hard work, planning, ingenuity, and self discipline —but those things, too, can become second-nature with practice. This pamphlet was written to help people in all walks of life to learn the truth about interest, and how to free themselves from Debt Slavery. Slavery. Please distribute this as widely as possible—forward it to all your e-mail contacts, make photocopies, upload the file to your website, post the text on your blog, distribute copies at your church, etc. You are doing a great favor for whoever you give this to. This pamphlet was written anonymously, because my identity is not important. Besides, some bankers might not appreciate having hundreds, thousands, or even millions of their slaves figure out "the system" and gain their freedom as a result. Money is power, and I do not have nearly as much money as they do.
Trap A and Trap B People frequently frequently fall into 2 well-laid traps. Trap Trap A tricks you into buying a dollar more than you need, which costs you 3 or 4 dollars in the long term. The benefit you choose is small (for instance, the benefit of having a brand-new car over a 2-year-old car), but you pay much more in the long run, especially because of interest. By avoiding this trap, you receive a LARGE savings, in exchange for giving up a SMALL benefit. If you buy a house or car that costs $10,000 more, you're not just making a decision to spend an additional $10,000. Yes, you are agreeing agreeing to pay back that additional $10,000, which increases your debut. But you will also pay a lot more interest. And for houses and cars, the cost of insurance on a more expensive model will be higher as well. So by learning to get by with less, you're saving a LOT more that the mere price difference between the two. Trap Trap B tricks you into spending money where there is no need to. For instance, spending a day at the theme park rather than a day at the park. Buying fashionable clothes when you are in no danger of going naked. Buying stuff just because it is on sale, even though you got by just fine without it. Habits like this can easily result in massive debt over time. The world at large is clueless about the real path to happiness, but most people follow the conventional "wisdom". I put wisdom in quotation marks because it is actually foolishness. foolishness. But the majority of people who have followed that conventional "wisdom" are now deep in debt of all kinds. They have little or no control over
Page 1 of 16
their lives, since they pay hundreds of dollars in interest every month to a bunch of rich bankers—bringing no benefit to their families at all. Since conventional "wisdom" leads to this kind of Debt Slavery, I would suggest it is time to revisit the philosophy that everyone follows, and expose it for the fraud that it is. Most people are too busy to stop and evaluate their life objectively—this causes many people to hasten down the road to misery, and wonder "What happened?" when they arrive there. This book is a road map, to get people OFF the road to misery and ON the road to a life where happiness is possible, where they can enjoy the fruit of their labors.
What is "Debt Slavery"? Debt slavery is where your debt load dictates your life. You would like your wife to be able to stay at home with the kid(s), but your monthly expenses are too high to allow that. You find yourself restricting the number of children you have, blaming it on your economic situation. In short, Debt Slavery is paying more than 5% of your income for interest on debts. Being poor is one thing. But being poor because some banker is getting all your money is another thing altogether! Being debt free brings a wonderful peace, a lack of worry that those who owe their lives away to the bank never get to experience. Debt Slavery is NOT the same as being poor. A poor, retired couple might be able to live well on $700 a month Social Security, because they have no debts. Meanwhile a young couple with much debt might not seem to be poor, but they are in Debt Slavery nonetheless because they give away hundreds or thousands of dollars a month in interest. They might live well, but they should be able to live even better. It is more desirable to "live with less" than to pretend to a higher standard of living than you can actually afford, and consequently become shackled with debt. Consider that some of the happiest families in history lived "below the poverty line". They were content with their station in life, and they worked hard. They did not try to behave or live like the rich. But today you have just that—poor people who want to pretend they are as well-off as people with three times their income. Today men only value wealth. Wealth, and the power that flows from it. Since these are the only things that bring respect in today's world, it is no surprise that everyone wants them. The true joys of life (peace of conscience, following God's law, raising a family, helping others, following one's true calling) are marginalized by those whose religion is Consumerism. But the expression, "the best things in life are free", is not just a cliché. I have seen plenty of evidence that supports it. The massive plague of Debt Slavery seen today is a result of ignorance, poor planning, poor self-discipline, and the "system" itself. Many people today do not understand the true nature of interest. They have no idea that there are other possibilities besides slaving one's life away for the moneylenders. Since the world is so fast-paced, and there are so many distractions, few people take the time to plan well. Our culture values "fun" and "spontaneity" instead of soberness and calculated planning (unless the latter helps us to earn money—which is the highest good, according to modern values). All the ads that surround us are not going to help us to control our desires. On the contrary, their aim is to make us want many things that we cannot afford. If we do not make a conscious decision to control our spending, human nature will coax us along with the herd into spending more than we earn—which can only result in debt. This destroys our happiness and spending power, because we not only pay
Page 2 of 16
for it later, we pay for it with interest. Debt would not be so bad if you only had to pay back $10 for every $10 borrowed. But unless you borrow from generous family members, you will pay back $15, $20, or even $30 for every $10 borrowed. Lastly, the plague of Debt Slavery can be blamed on the "system"—the credit card companies and the economy itself. The credit card companies are guilty because they send out 6 BILLION credit card offers a year to families nationwide (that is the actual number, not an exaggeration!). And when they get you to carry a balance, they only ask for a small monthly payment—which barely covers the interest on the loan, keeping their victims in debt for many years. The economy is also to blame because there is not enough money in circulation to go around (see below, About the Money Supply). But the credit card companies are not all-powerful—they are easily resisted. So the victims of their schemes must bear at least part of the blame. After all, I receive dozens of such offers every month, and I know what todo with them. I cast them with disgust into the trash where they belong. I react as if someone tried to chain me up and cart me off to prison (because that is what they DID try to do!) To illustrate the evil of Debt Slavery, take a family that has a $9,000 balance (the current national average) on a credit card that has an 18 percent interest rate. Since they read How to avoid Debt Slavery, they decide to cut up the card and never use it again. Even if they pay the minimum payment of 2 percent of the balance each month, plus interest, it will take them 47 years (and close to $33,000) to pay off that $9,000 debt! So every $3 gallon of milk cost them $12, every $50 pair of shoes cost them $190, etc. If I had to pay that much for goods and services, I'd be pretty low on cash! Now imagine how much money they'd be giving away to the bankers if they owed $18,000, or even $25,000! They'd never be free, unless they started paying big chunks off the principal (by sending in extra payments). Now we will define Debt Slavery by what it is not—namely, freedom. I have known (and heard of) many retired couples, living off Social Security alone, who have plenty of disposable income. That is because they managed to pay off their house, they have only one car (which is paid off) and they never used credit cards (at least not to carry a balance). A young couple, burdened with debt (credit cards, student loans, mortgage, car payments), might need an income of $3,500/month to support a middle class lifestyle. But a debt-free retired couple can probably achieve that same lifestyle for $1,000/month. Remember, being in debt means you have to pay back the actual loan—the principal—every month as well. Interest is the worst part, because it is a total waste. But the young couple in debt is ALSO repaying what they borrowed, as well as paying interest on the various loans. Now you see why people who never use credit cards often have plenty of money. Do you think they cast aside credit cards because they are "well off", or do you suppose they are "well off" because they never use credit cards? Anyone who runs up (and carries) a credit card balance has to send free gifts (interest) to the bankers every month. Combined with other loans (college loans, mortgage, car loans), that "monthly waste" could add up to quite a sum. $1,000 a month (or $12,000 a year) in interest adds up real fast. Some of the more affluent among my readers might ask, "Debt Slavery doesn't matter to me. I can afford everything I want." To that I would respond that "money doesn't grow on trees". If you are making $100,000 a year, you are probably in a harder job, or at least a higher-stress job, than someone making much less. When a
Page 3 of 16
company pays well, it expects a lot in return. If John can live debt free on a $30,000 salary, Tim must be foolish to waste so much of a $100,000 salary—considering that Tim puts up with more, is responsible for more, stresses out more, and is dependent on a "booming economy" much more than John. My point is, if you're going to work extra hard at a high-responsibility or high-stress job, you should at least get to enjoy the fruits of it. You should live much better than a debt-free person making 1/4 your salary. How many people seek out such stressful jobs only because they pay well—and because they need money to pay for their expensive house, student loans, and the credit cards they ran up while in college?
About the Money Supply The USA does not print its own money. The "Federal" Reserve, a private bank, creates and manages our money supply! It is neither federal, nor does it have any reserves. The US government surrendered its natural right to issue currency several times in its history, but it did so once and for all in 1913 with the Federal Reserve Act. Now the government "borrows" huge sums (a billion here, 10 billon there) in the form of Treasury bonds, which are tacked onto our $9 trillion national debt—while the Federal Reserve, for the price of ink and paper, creates that money out of nothing. The money is worth something because the Government promises to pay back the bonds "someday". But if a government can issue "bonds" which it must repay someday, why not cut out the middleman and issue the currency itself which would involve no debt (promise to pay) for the government? Incidentally, did you know that the USA did not need an Income Tax during the first one and a half centuries of its existence? But why should you believe me? Believe a bunch of men much greater than me, such as our Founding Fathers: "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." -Thomas Jefferson "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance." -James Madison "If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations." -Andrew Jackson "The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity." -Abraham Lincoln "It is absurd to say our country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the people." -Thomas Edison "If [the United States Government issuing interest-free and debt-free money] —which had its origin in the North American Republic during the war (1861-65) —should become permanent, then t hat Government will furnish its money without cost. It will pay off its debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of civilized
Page 4 of 16
governments of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed or it will destroy every Monarch on the globe!" (London Times Editorial, 1865) Despite these warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote: "I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world—no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson Money is the lifeblood of the economy. Money is to the economy what oil is to the engine of a car. Try removing all the oil from your engine before your next road trip, and see what happens. The engine seizes up, and is ruined. The same happens to the economy when the money supply is reduced (called a "contraction"). Whenever the money supply is contracted, it causes a recession, and if it lasts long enough, a depression. Money is to the economy what blood is to the body. You can take a little out of circulation and things will continue to function. But take out a pint or so, and a man will not be able to do a full days' work (he will not perform in optimal condition). He will be a bit tired, etc. Take out another 1/2 pint, and he will really become useless for a day or so. If he loses too much, he needs to go to the hospital, and needs recovery time (and/or a blood transfusion). "I am afraid the ordinary citizen will not like to be told that the banks can, and do, create money...And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hands the destiny of the people."-Reginald McKenna, former Chancellor of the Exchequer, January 24, 1924)
What is Interest? Interest is legal theft. It used to be called usury, and was against the law in most Christian countries (as well as condemned by the Catholic Church). Here is an easy way to understand interest. If every steak you bought had 60% fat, you would not be getting much meat for your money. Say you bought a 5 lb. steak for $3 a pound. But out of that 5 lbs. of steak, you only get to enjoy 2 lbs. of actual meat! The rest is completely wasted (assuming you have no use for that fat. Interest is actually worse, because there is no possible good to be gained by it!) You pay $430 a month for a car payment, but $150 of that is interest. That money just disappears, and you never see it again. It does not go into your car, it goes to the bank's coffers. The REST of the $430 payment goes to repay the loan itself, which covers the cost of the car you bought, license and title, dealer fees, etc. The greater the loan, the greater the interest. So it is a good idea to take out small loans (if any), not big ones! So what difference is there between interest, which is a total waste, and taxes which are a total waste? The fact that taxes are outside our control, whereas we do not have to pay any interest if we choose to exempt ourselves by living within our means.
Materialism The constant advertisements thrown at us, and virtually all the peer pressure we experience try to convince us that to be "good patriotic Americans" we have to buy a bunch of "stuff". We're supposed to invest in America—
Page 5 of 16
have confidence in the economy—by taking out huge mortgages, buying cars, spending all our money, and even going in debt if need be. Worrying that constant growth cannot be sustained forever is un-American, according to them. These things do not make us happy though. People keep trying all the time, and in fact some things DO bring temporary excitement—but not that deep peace that few people get to experience these days. Most people today, especially those in debt, experience only stress, not peace. There is nothing like the wonderful feeling of owning your house (debt-free), driving a car that is paid for, or having no credit card debt. Your very food tastes better when you know that it is paid for, and not sitting on your credit card just waiting to be paid for someday. Every trip to the gas station is a joy, when you know that your car is not horrible on gas—and you can afford it, because you're not paying hundreds of dollars a month in fruitless interest payments. Americans pride themselves on being free, but how free is a man who: - Does not own his house - Does not own his car - Owes thousands of dollars to various banks - Has to send his wife to work out of necessity, because his expenses are so high - Sends his children to public school, because he cannotafford private school - Restricts the number of children he has, because he feels he cannot afford more - Pays a huge portion of his earnings every month to his"masters", the bankers Those traits describe someone living in serfdom or slavery, not freedom. It describes someone living under a tyrant—who takes most of the peasant's income, and just keeps them alive enough to keep working for him. The tyrant tells them how many children they can have, and forces even women and older children into public service projects. The land, the house they sleep in, and the animals they work the fields with do not belong to the peasants, but to the tyrant. The tyrant today is not the government (although Income Tax is something surprisingly new in our nation's history). The tyrant is the network of banks, which conspire to suck people dry at every turn, which causes such a drain that both parents have to work. This alone causes countless problems in the world today, because children were meant to be raised by their parents. They were not meant to be wards of the state. On a side note, I am not a "good little consumer". I contribute almost nothing to the banking system—neither paying interest, nor giving them money to lend out at exorbitant rates to other people. If I kept $5,000 in the bank, they could lend out $50,000 at 6 or 7% interest, while only paying me 3% interest on that $5,000. Talk about massive profits! Banks can lend out 10X their cash reserves, due to the structure of the Fractional Reserve banking system. Now you see why the banks want your business! Whether you're a saver or a spender, they can make big money off of you. I stick to reality—if something does not make sense (like every man, woman and child making 8% each year, every year, on the stock market) then I do not participate. Sure, money can be made on the stock market, but
Page 6 of 16
once in a while the whole thing crashes because it was puffed up like a marshmallow in the microwave—just begging to pop. The same with real estate. When money can be made without any effort on my part, I become VERY suspicious. How possible—or moral—can that possibly be? Who am I exploiting to make that money? I know for a fact that money cannot produce more money by just sitting there. If I invest in Wal-mart and receive yearly dividends, etc. how did I make all that money? The answer is: off the backs of the slaves in China, and the poorly-paid employees of Wal-mart. We may be powerless to bring down the "Federal" Reserve and return the authority to print money to the Federal Government where it belongs, but we can limit their power over ourselves by avoiding their chains—by voluntarily staying out of debt. At the moment, slavery is not forced upon us—we can choose to reject the yoke of their slavery. When you select that more expensive car, when you charge that new plasma TV, when you buy something (on credit) just to keep up with the Joneses, you are attaching one more chain to your ankles. Every loan you have contributes to reducing your net income. You work hard every day to bring in $2,500 a month, but the bankers get to legally steal almost 1/2 of that right off the bat. Out of the other $1,300 you make a small payment on the actual principal (the actual MEAT) of all your loans, and what is left over can actually be spent by you (on food, utilities, etc.) Remember, the interest portion of your various loans does not reduce your debt load by even 1 cent. That is the bankers' fee, the bankers' reward, for lending you some money.
The Stock market Who says that every man and woman is entitled to free money (8% yearly return) on money they put in the stock market? The excuse "risk merits reward" does not work, because nowadays people truly believe that a rounded pick of stocks will make from 6-10% (or more) every year. When the market takes a dive, everyone feels cheated. I thought that risk was part of the game? But no, people genuinely feel that it is realistic and normal to make money while doing absolutely nothing. "It's my money making money," they say. But how can money make money? Only people can produce the goods and services which have a dollar value. A 10-dollar bill today is a 10-dollar bill next year. Money is not productive by itself. There are a few small exceptions—if I borrow $1 million for a printing press, I might be able to produce items of value—actual wealth—with that press, and I can share that newly generated wealth with the people who lent me the money. That is the theory behind interest on loans. But how much of that money raised by the likes of Google and the other technology IPOs goes to build machines which will directly generate new wealth? Not very much. A lot of money is spent on advertising, litigation, research, personnel, non-producing equipment, vehicles, overhead, interest, etc. which does not have any kind of return. So a lot of money put into the stock market is NOT productive. An 8% annual return has to be artificial. It must be supply and demand—when a large number of people compete to buy the same shares, it drives up the value of each share. The stock might not be worth that much, but what does that matter to most people? Everyone wants to retire, and what better way to do so than to take one's savings and invest it in the stock market where anyone can earn 8% a year? Now if money invested in a company can hardly earn an 8% return, then how can interest on non-productive loans such as home mortgages, car loans, personal loans, and c redit card debt be justified? Simply put, it cannot. It takes money out of the economy, which is not replaced. Unless the Government borrows more
Page 7 of 16
money from the Federal Reserve (to fight a war, etc.) then the money supply contracts until you have a recession, and eventually a depression. If I was producing wealth with that car loan, it would be OK to suck $150 out of the economy every month in interest, since I'd be producing wealth at the same time. But who makes money off their car? Unless you're a cab driver, no one! Multiply that $150 a month by the number of loans each person has, then multiply that by the number of debtors in America (or the world) and you can see how much money the bankers are siphoning from the economy on a yearly basis. But back to the stock market: It is like a huge Ponzi (pyramid) scheme, where the average Joe ends up being the one holding the bag. The average middle-class worker is the one who ends up losing—because they never "get out" in time before a crash. The huge investors know when something is going to happen (or they are about to make something happen), and get their money out ahead of time. The poor people do not have this kind of "insider information", so they end up losing. Ponzi schemes usually only benefit the creator, and the first few people to join. They make their big money, but eventually the market gets saturated, and the last people to join end up paying the bill. Corporations are always looking to make more profit, which is their only goal. How much damage has been done to society by corporate greed? It is hard to say. But it is true that the corporation itself only exists to make money for the shareholders. And they often succeed—passing on some of the loot to the shareholders. Individuals make money as well, but they do so in a more down-to-earth manner. Generally speaking, they only earn what they need to live on (plus some savings for retirement). They have far more noble motives ("supporting my family", "doing what I was meant to do with my life", etc.) So are the shareholders guilty for the various injustices perpetrated by corporations, in the name of "a more profitable 2nd quarter"? Somewhat. It is true that the gross violations of human rights (such as Wal-Mart's encouragement of the slave-labor conditions at its factories in China) can be blamed on this or that executive— but it is nevertheless true that they are all motivated by the fear of a lackluster quarter. They fear what would happen if they improved conditions in China, at a cost to their bottom line. What would happen to Wal-mart if their profits went down? The shareholders would all be angry and yell, "My mutual fund only made 4% thanks to your 'moral behavior'! A 1-year CD would have given me 5%! I expected to make 8% this year—I gotta retire next year at 50, you know! You idiots are putting all my retirement plans on hold!"
Credit Cards Americans are notoriously deep in debt—and not just for their home and car. The average adult carries a balance of thousands of dollars on any number of retail and bank credit cards. Personal loans—including home equity, debt consolidation, and student loans—also contribute to this debt load. What is important about this, is that all of these sources of debt contribute to the draining of a family's budget. A monthly budget is a snapshot of how a family is doing. If the income is greater than the expenses, the family is doing well financially because they have money left over—which can be saved for future needs. This is called a net surplus. But if the monthly expenses are greater than the monthly income, the family is doing poorly, because it is sinking deeper into debt with every passing month. This is called running a deficit.
Page 8 of 16
If there were one single law of "how to not be a debt slave" it would be: avoid debt at all costs. Even going into debt for necessary things (house, car) can be done wisely. Choose a house that you can live in for a while, but do not buy as much house as the realtor says you can afford. The realtor is paid a 3 to 6% commission on the house you buy. Take a calculator and see which house will bring a greater commission: an $80,000 house, a $150,000 house, or a $200,000 house. This should put you on your guard as to what the realtor is going to be pushing for. (Hint: the more expensive house, always.) Tell him how much you are comfortable spending, and he will be forced to oblige you. If you do not intend to go over your head, the realtor cannot force you.
Mortgages — Buying a House First of all, avoid ARM mortgages at all costs. They lure you in with a teaser rate of 2 or 3%, but that rate resets every so often, usually to something higher than a fixed-rate mortgage would have cost you. Countless families have lost (and will lose) their homes because of shady realtors, lenders, and ARM mortgages. Beware a mortgage that sounds too good to be true. S ome shady mortgages charge you only 2% interest (so they claim), but instead of your balance going down a little bit every month, it actually increases by many hundreds of dollars! The interest is merely "deferred". Make sure you read the fine print. So we will restrict our discussion to normal, 30-year fixed-rate mortgages. It is important to never owe too much on a house at any given time. For every $20,000 you borrow (at an interest rate of 6.5%) you will pay $108 a month in interest. That is hard-earned money taken out of your monthly budget, and given to some rich banker to add to his 300 million dollar fortune. It is money out the window, plain and simple. An $80,000 house will cost you $432 a month, just in interest. You have to give the bank that big of a "gift" every month—plus the amount you must pay in property tax, and principal (the good part—which is actually taken off your debt balance). Look at how interest can add up, and cost your family a fortune: (Assuming a mortgage rate of 6.5%)
Cost of House Interest paid (per month)
$80,000: $432
$100,000: $540
$120,000: $648
$140,000: $756
$160,000: $864
$180,000: $972
$200,000: $1,080
$240,000: $1,296
If your interest rate is higher, then you pay even MORE interest than what is shown above! For instance, a rate of 7.5% would cost $625 per month in interest for the $100K loan. But it is even worse than that! The owner of a $200,000 house will also pay twice the property taxes (and home insurance) as the owner of a $100,000 house. That, too, is money out the window that you will never see again. You had to work hard for it, and/or your wife may have had to leave your child(ren) at daycare and go back to
Page 9 of 16
work to earn that money, but some banker is enjoying it right now. That humble, $70,000 house looks a lot more livable now... But some might say, "I will need a bigger house at some point. Might as well go with a bigger house right now." Answer: You do not know that. No one's fertility is guaranteed, and illness/accidents happen. Man writes his plans in pencil, but God has the eraser. But in case nothing bad happens to you, and your 3 or 4 bedroom house becomes too small for your family, you can always move to a bigger house when you need it. Here is why that works better: By the time you have 5 or 6 children, you will have been paying off your humble $70,000 home for 8 or 9 years. You will not owe $70,000 anymore! Especially if you follow my advice of pouring a good part your savings into your home mortgage. Plus, if you're lucky, your house might have gone up in value. So you can sell your house, pay off your mortgage, and still have $50,000 (or much more) left over to put toward the next house. Now you can buy a $100,000 house and still have a decently-small mortgage: ($100,000 new house - $50,000 cash from old house = $50,000) That is the key. The key is to pay as little interest as possible, because that takes away from your net worth. Paying interest is a form of slavery. Any other use of your money can be justified (home improvements, giving to charity, new car, food, utilities, etc.) because you are doing something good with it. But interest is a complete theft of your hardearned money. No one likes paying an occasional $100 traffic ticket—why should they happily give up $1000 or more in interest every month? And once you've picked out a decent house (one that you can easily afford, not barely afford), remember that mortgages are not eternal. You will NOT necessarily have to pay on a mortgage until you retire. That is simply not true. While your mortgage is a good chunk of change, it is not an astronomical sum that you will never be able to pay off early. In fact, you can pay it off much faster than you ever thought possible. Every thousand dollars you send in to pay down the principal means a savings of several hundred dollars a year in interest. And just think—when your mortgage is paid off, no more house payment! That is hundreds of dollars left over in your budget every month, to spend on whatever you want! Before (with $5K in savings): + Earned $20 from savings account - Paid $145 in mortgage interest Net result: $125 in the hole
After (with $0 in savings, $5K paid to mortgage): + Earned 0 from savings account (now empty) - Paid 100 in mortgage interest Net result: $100 in the hole
Page 10 of 16
Which is a better place for your money? Savings accounts pay you 3%, while mortgages cost you at least 6%, every month. It is pretty obvious that paying down the mortgage is better.
Car loans Your selection of a car is one of the biggest financial decisions you will make, after the choice of a house. It is very difficult to come out ahead with your car, since it constantly loses value. Here are some numbers to think about. The average new car loan today has a rate of 7% APR (Annual Percentage [interest] Rate). If your credit is poor, you might even pay significantly more. Note that this does not include car insurance, or the principal of the loan itself. Only the interest (complete waste) portion. This is how much your family loses each month by having a car loan of various sizes.
Cost of Car Interest paid per month (7% APR)
$12,000: $70
$14,000: $82
$16,000: $94
$20,000: $117
$24,000: $140
$28,000: $164 - this is the current national average!
$32,000: $187
First, choose a car that is at least 1-2 years old. If you buy a new car, it looses several thousand dollars "when you drive it off the lot", as they say. This is true. So why spend the first year of payments ($300 X 12 payments = $3,600) paying for what you lost 20 minutes after you bought the car? It seems like a great waste. In fact, it might take longer than 1 year to pay for the initial depreciation, since that $3,600 in payments would include interest, which goes right to the bank's coffers—not to the balance of your loan (principal). Second, choose an appropriate car. Ignore the advertisements and peer pressure. An average-looking man in a red corvette is...still an average-looking man. A skinny 5'6" man in a Hummer is still short. The shy computer programmer will be just as awkward around women if he drives a BMW. Besides, any woman that falls for a man because of his car will obviously be drawn to another man with a better car at some point in the future. It is a loosing battle, and one that is best avoided from the start. If all your friends have diesel trucks that get 9 MPG or SUVs that get 10 MPG, just laugh at them every time they have to fill their tank. He who laughs last, laughs best! Owning an SUV does not mean "I've arrived" A family of 3 (or even 4) does not need to go out and buy a huge SUV. Regular cars are not without the ability to tote things around—that is what the trunk is for. A sedan (mid-sized car) will do just fine for virtually all tasks. Pay attention to the gas mileage, not just how the car looks. Gas prices are not negligible, especially today with $3 gas. $5, $6, or even $9 a gallon gas is a very real possibility in the near future. It is possible that by 2015, cars might become prohibitively expensive to drive. This is very possible if demand for oil/gasoline keeps increasing worldwide,
Page 11 of 16
while production remains stagnant (as it is right now). Explorer. Pathfinder. TrailBlazer. Navigator. Excursion. Expedition...to Wal-mart down the street? Give me a break. As if the average suburbanite is blazing a trail through the wilderness to explore uncharted territory. (Actually, I'm sure the commercials display such imagery all the time. See how TV rots the brain?) I assure you that not just hundreds, but thousands of your neighbors have been to the same mall you're driving to. And I seriously doubt that 4X4 traction is needed to traverse the well-paved road to your local, boring, nondescript strip mall. Third, do not take on payments for more than 4 years to pay for a car. To convince people to buy that car they "want" instead of the one they could get by with, salesmen flash a low monthly payment in front of customers' eyes. But that payment requires paying on a car for 5, or even 6 years! Anyone who falls for this will also be the type to want a new car more often than every 6 years (they obviously are not too strong against advertising and sales pitches, right?) Try to limit yourself to what you can pay off in 3 or 4 years. It is a fact that cars start to need a bit of attention/service after about 4 years. Fourth, buy instead of lease. Yes, when leasing they hold you in the palm of their hand, but that tender loving care comes with a price tag. Think about it: if the cost of servicing your car was not less than the monthly payments they get, they would never offer you such a deal. The dealership is not in business to lose money. Keep in mind that the occasional trip to the garage will not break you, especially if you're no longer making car payments! Drive a paid-off car until it becomes not worth fixing, and you will save tens of thousands of dollars over your lifetime. Fifth, do not fall for "more horsepower". A 4-cylinder car can reach 40 MPH almost as fast as a 6-cylinder, especially in rush hour or city traffic. Who cares if the sports car can theoretically reach 210 MPH? How many roads in your area have a speed limit above 70? (zero) Most of your driving will be in the city, where a fast car is a source of frustration. On the highway you might be able to outrun cars easier, but you might also get lots of speeding tickets. Police love to pull over the fast and flashy cars. Suppose we had a race: I get in my 4-cylider Saturn, and Frank gets in his 6-cylinder vehicle. We drive from one side of our town to the other (approximately 30 miles), and see who can get there first. There is a good chance that the results would be more due to luck (hitting the fewest red lights) and managing to cut people off in traffic, etc. than on our respective cars' engines. If Frank did manage to beat me, it would likely be by 30 seconds or so. Is he REALLY going to use that 30 seconds so productively that it is worth the $6 or $7 more he spent on gas during the 30 mile trip? Not likely. (Note that Frank is also paying extra money every month in car payments and insurance—a 6-cylinder vehicle is always more expensive than a 4-cylinder.) Remember that a car is basic transportation. It is not going to make you into a rock star, sex symbol, or prom queen.
Putting it all together Now some people think that everyone carries a balance on several credit cards, or that everyone will pay a house payment every month no matter what, or that it is impossible to avoid a monthly car payment. I must say that is a dangerous way of thinking—those people have apparently given up without a fight. Since they do not believe it is possible to be debt free, how can they avoid being in debt? But I will answer each of these 3 objections.
Page 12 of 16
First, the idea that everyone these days must owe something to the credit card companies. If you want to keep up with the Joneses, then yes. If you watch TV and expose yourself to its many advertisements, you will be driven to insanity by all the things they will make you want. Since you probably cannot afford most of them with your current income, they expect you to eventually freak out and buy at least some of those t hings using credit cards—especially if you get credit card offers in the mail every day (credit card companies send out 6 billion every year!) But the Joneses are actually quite unhappy. Mr. Jones and his wife both have to work to meet their monthly expenses, and despite that, they wanted to wait several years before having only 2 children. Why is that? Plenty of people can afford children right away, many more than just 2, and right after they're married, even on a modest single income. That shows that Mr. Jones is not t hinking things through deep enough, or perhaps he is not thinking for himself. His kids each have their own bedroom and TV, they have tons of stuff (which only makes them materialistic and spoiled), but Mr. Jones is too busy to spend time with them. Deprived of the love they really need, his kids end up depressed, cynical, withdrawn, anorexic, and dysfunctional in general. Mr. Jones obviously thinks that children are more expensive than they really are. Who gave him that idea? Probably the television that he watches every night, and many of his co-workers who spend too much money on their own children. But children are NOT that expensive, which is proven by the existence of large families (with as many as 9 or 10 children) which do just fine on a modest income. Yes, Mr. Jones is a sad case, who should be pitied instead of envied or "kept up with". Second, a house payment is not just part of life. It is a big part of most people's monthly budget for a good portion of their working years, but a house can be paid off in as little as 2 years, depending on the cost of the house and one's income. Just because most people have a mortgage from age 21 through age 60 does not mean that you have to. Your mortgage has a balance, just like any credit card. You can mail in an extra payment at any time, which comes right off what you owe. Your normal monthly payment—say, $800—includes property taxes, home insurance, principal and interest. So only $150 or $200 of that monthly payment actually brings down the principal (balance) of your mortgage. Therefore every $200 principal payment you send is like another monthly payment of $800, as far as what it does for your mortgage balance. Send in $2,400, and it is like paying a year's worth of payments ($800 X 12 = $9,600). See what a great effect such principal payments have? Such extra payments are really the best place to spend your extra money. The interest portion of your mortgage payment goes down every month, as the principal balance decreases. The bank looks at your daily balance to calculate how much interest you owe on a given month. So when you make an extra payment, it has the immediate effect of lessening how much interest you owe every month from then on. Your monthly payment stays the same, so as the interest portion decreases, the principal portion (which actually pays off the house) increases. To give a simplified example: last year you paid $800, with $400 in interest and $150 toward the principal (the other $250 is property taxes and insurance). After making a years' worth of payments, plus an extra $1000 payment, the same $800 is split up differently. Now only $300 is interest, and $250 goes toward the principal. So you are wasting less, and paying off the house faster every single month, even with the same monthly expense ($800). As to the third myth, that "it's impossible to avoid a
Page 13 of 16
monthly car payment", everything said above refers to car loans as well. It is true that cars decrease in value while houses increase, but you can choose a reasonable car, and buy it rather than lease it. Even if you need to make a few trips to the garage now and then, it will still be much cheaper than eternal payments to a car dealership for a "we'll take care of everything" lease. Leasing a car (getting a new one in the process every 4 years or so) is much like renting an apartment. In exchange for someone else taking care of all maintenance, you give up all hope of ever owning one yourself. Every month you work hard, pay a bunch of money to some landlord and/or car dealership, and life goes on. You never gain anything long-term. You own at 45 exactly what you owned at 25, give or take a few DVDs. There are a few good reasons to rent rather than buy—if houses are too expensive in your area, or your health is poor, or you are not planning on staying in the area longer than 2 years. But most people who rent are forced into it, because they either cannot save up a down payment on a house, or they have bad credit due to past bankruptcies (caused by debt). So Debt Slavery is the cause of this problem as well. So neither mortgage payments, nor car payments, nor credit cards are a necessary part of life. I have plenty of living proof, including my own experience. For example, my house is nearly paid off (as of this writing), and I am nowhere near retirement age. I carry no credit card balances, and both of my cars are paid for. Because I only have to support my family and not a bunch of bankers, we get by just fine on my income.
Appendix A: How to get out of Credit Card debt If you carry have credit card debt, all is not lost. When it comes to freeing oneself from Debt Slavery, better late than never! 1. Be convinced of the possibility, and necessity, of not being in debt and keeping the bankers rich with your interest payments. This is important because some sacrifices will be required, especially during your visits to the mall, shopping centers, etc. It takes a bit of self-discipline, and most people around you will be a bad influence, since many of them are still blissfully ignorant Debt Slaves. (Give them a copy of How to avoid Debt Slavery, so they can help rather than hinder you!) 2. Make sure you do not consider the "available credit" on your credit card(s) as "money in the bank". That is not a checking account balance! It just tells how much they will let you enslave yourself to them. You should not have to borrow anything—many people live VERY happy lives debt-free. (In fact, they live happy lives partly BECAUSE they are debt-free!) The only time anyone should go into debt is from necessity. If you have unexpected medical bills, or if you lost your job, you have a good reason to go into debt. But getting a new computer, car or plasma TV is not worth the high cost of being in debt. 3. Realize that every credit card purchase is like taking out a loan. Do you really want/need to take out a bank loan to pay for that $3 latte? If you only make the minimum payments on your credit card, that latte will cost you $12 before you finally pay it off. Talk about expensive! Remember, if you are in credit card debt, there are no good sales for you to take advantage of. Unless they are selling something for 90% off, you are best off leaving your credit card in your wallet where it belongs, undisturbed. Even an honest-to-goodness bargain should be passed up if you cannot pay cash for it, as I will demonstrate: A $30 shirt is marked down to $10. (Nothing is wrong with it, the store is just having a crazy sale). Anyone not in debt would be stupid not to buy this shirt. However, if you put it on your credit card, and you can only afford the minimum monthly payment, it
Page 14 of 16
will take you decades to pay for that shirt, during which time it will cost you about $40. Is $40 for a $30 shirt a great deal that you "can't pass up"? But it is true that you will pay $40 for that $30 shirt. So why fall for the sale, when you know better? The trick is to know better. In fact, the shirt would likely be destroyed, go out of fashion, be tossed out, or sold at a garage sale long before it was paid off. 4. Form the habit of not using credit cards. It would be a good idea to switch to a cash/check system for a while (maybe 6 months), until you get used to the idea of buying only what you have the cash for. Credit cards are fine if you use them only for convenience—if you pay off the entire balance every month. They can actually help your bottom line if you get "cash back" or other rewards for your purchases. I have a card that gives rewards, and I just spent $100 in Home Depot gift cards that I earned with little or no effort (just paying my bills, buying groceries, etc.) 5. Use any savings you have (making what, 3% interest?) to pay off your most expensive credit cards (costing you what, 18% interest?). If you have any retirement accounts, cash them out, even if you have to pay a penalty. Your best hope for retirement is using the time from now until then to keep all the money you earn, and stop sending it off to the bankers. If you really want to secure a bright future for yourself, paying off your credit cards needs to be your first priority. I know that conventional wisdom says, "Save for retirement!", but that is for those who are not paying hundreds of dollars a month in interest. Saving 50 cents for every 10 dollars you pay in interest makes no sense. Besides, you will never be able to live off your nest egg in 10, 20, or 30 years if you're still paying on your credit cards! Having an insufficient retirement account will not ruin you—but having a load of debt will make post-retirement living nearly impossible. As long as you have credit cards and other debt, you simply will not be able to retire. Every year that you have no debt means thousands of dollars (per year) staying in your household. That will make a nice contribution to your future retirement fund! 6. Once you have put most of your savings toward killing credit card bills, then you are ready to use a very powerful technique. Many finance gurus and authors have made a lot of money pushing this system. I call it, "Avalanche of Debt Destruction". First you make a list of what credit cards you have, and their interest rates. Sort them from the highest interest rate (say, 21%) down to the lowest (say, 14%). This is the order in which you must pay them off. Every month, send every spare dollar you can to that first credit card. When it is paid off, send the money you would have sent THAT card to the next card on the list, and so on. Pretty soon you're throwing some pretty big sums at your cards! It is like a snowball rolling down a snow-covered mountain. It starts out baseball-sized, then it grows to soccer ball size, and soon the ball is the size of a small house. Part of the reason this system works so well, is that you pay less and less interest every month, which can then be spent on the cards you have left. Pretty soon you have no cards left, and you will have tons of money left over in your budget every month—not only the interest you were paying every month, but the principal as well. That could be hundreds (or even thousands) of dollars! 7. Another possibility is debt-consolidation loans. The interest rate is always less than most of your cards. You should not be afraid to put your house on the line with a 2nd mortgage. Your finances are practically ruined already if you have credit cards, and you must free yourself at all costs. Home equity loans have a better (lower) interest rate, because your house is offered as collateral. Think about it: If you lost your job, and could not get another, you would be bankrupt either way (with or without the 2nd mortgage). In some states, they are not allowed to take away your primary residence. But assuming that you do not lose your job, there are two possibilities: 1) You stay in debt for the rest of your life 2)
Page 15 of 16
You manage to get out of debt by taking out a 2nd mortgage. The 2nd mortgage (Home Equity Line Of Credit, or HELOC) should not be as much as your 1st mortgage, of course, unless you owe that much in credit card debt. So you have nothing to lose. But with any of these means of paying off credit cards, the key is to faithfully obey the following step: 8. Cut up any credit cards you manage to pay off, whether by cashing in savings, getting a debt consolidation loan, 2nd mortgage, or by following the "Avalanche of Debt Destruction" system. It does no good to pay off your credit cards if you charge them up again. 9. Try to avoid temptation as much as possible. Many people have fallen into consumerism and materialism. Advertisements are everywhere. Try to excuse yourself from this onslaught as much as you can. Television is a big source of ads. Either use a Tivo, or only watch DVD movies. But the best solution is to throw out the TV (or at least stop watching it—move it to the basement or a side room—get it out of the family room). Your children will not scream for tons of licensed merchandise and clothing if the TV is not there to tell them what they "need". Children are not nearly as expensive as the consumerist society makes them. Children raised without TV can entertain themselves, have good imaginations, and are much more well-behaved. Studies have shown that children cannot develop certain skills nowadays—those which require patience and repetition— because of the distraction of TV. Newspaper ads come in a bundle (in the middle of the Sunday newspaper, for instance) and can easily be thrown away in a single swift motion. There are enough ads out there that we cannot escape, without inviting them into the sanctuary of our home. When an advertisement is tempting you to spend money, just keep your eyes on the prize. Think about how much better off you will be when you can keep all the money you currently pay in interest. The very item you are desiring might be within your reach soon—and you will be able to pay cash for it—if you get/stay out of debt. If you really need something, then save up for it. This is a good test to determine, "Do I really need this item, or is it just a whim?" If you still feel a strong need for an item after you've saved up for it for months, then by all means go buy it—you earned it! Do this, and your house will seem more spacious, since it will not be storing a bunch of useless junk! 10. Keep in mind, that when you are out of debt (even partially), you will have much more spending power. Though you may have to tighten your belt while you get out of debt, you will be so much better off in the long run. When all your income belongs to you, you will get to spend it all on your own family, and not some banker's private jet! Better to improve your home, send your kids to a private school, give to charity, or give $200 Christmas gifts every year than to spend $2,000 a year on interest, for which no good people benefit. 11. Re-think how you see the banks and credit card companies. Do not consider them beneficial businesses, helpers or friends who care about you. That is what their advertising campaigns would like you to believe. The truth is they are tyrants, vultures, who would just love to enslave you, drive you into poverty, and take the food out of your children's mouths. Consider them a necessary evil at best, and only go to them when you are absolutely desperate.
Source: http://www.economicwarfare.org/Archives2007/DebtSlavery.html
Page 16 of 16
