Income, debt and your life

Date: Mon Jan 04 2021 ; Tags: Personal Finance »»»» Debt

As I said in the introduction, my wake up call was the debt. I figuratively woke up one day seeing the level of debt I had accumulated. Prior to that awakening my financial knowledge was very weak, and I ignored the details of my financial life. Bills would often go unpaid, not because of lack of money, but simply by ignoring them. As a result the credit card interest rates were high, and my first lesson was in how I had created a trap to limits my choices, so let me explain.

available cash = income - necessary expenses

A very simple equation, yes? A grade school child could calculate this as it's just simple subtraction. Yet I never did the calculation, until that fate-filled day. With $35,000 in credit card debt, at high interest rates, I was paying $600 per month in interest, not the minimum payments but interest, on that debt. That $600 interest per month approximately equalled my "available cash", which meant that no matter how I struggled I was never going to pay it off because the available cash (beyond paying for current expenses plus interest) was effectively $0 per month.

The despair that I would never get out from under that burden was great. It was a trap, yes? One that I could seeminly never get out of.

This gives the first principle to financial freedom:

Money can be an entrapping burden, or a freeing lift

See, flip the situation around and consider instead of having $35,000 in debt, it as $35,000 in investment. Investments generally don't pay as high an interest rate as the mid-20% rates on my credit cards then, so let's use an example of a stock I currently own which invests in munipical bonds (ticker: MYC). It earns a 6.5% interest that's tax-free, making it equivalent to 10.5% yield.

$35,000 x 6.5% = $2275/year

What could you do with $2275 per year of tax free income? Well, it's not enough to live on, but it would give you more choices in your life wouldn't it?

Money as "life force"

The difference between these two scenarios is the effect on your life force. Life force? This is a concept some authors use to describe the role of money in ones life. Obviously money is not literally your life force, but for the purposes of living life in the material world of our times, money provides the motive force enabling you to maneuver that material world, hence "life force". Every breath you take costs money, it seems.

In the debt-ridden scenario ($35,000 of debt) some portion of your work is not fueling your life, but is fueling the life of the credit card company. In the debt-free scenario your work not only fully fuels your life, but is amplified by the secondary income from your investment pool.

Money is your life force in the material world, and your actions can diminish or amplify that life force

That life force is directly represented by the number of hours you work to earn the money that fuels your life.

Let's discuss some practical implications. Say you want to buy a new car, and the one you've chosen costs $25,000. How are you going to pay for it?

1. The way of debt: Go to the dealer, having scraped together a downpayment, and buy the car on the spot taking out a loan to cover the rest of the price. You end up with $4,000 downpayment, and $21,000 financed at 7% interest. Note that the first years interest will be just shy of $1470.
2. The way of amplified life force: Knowing that you eventually will need a new car, you've been saving for years in an interest-bearing account. You can pay cash, and do so. Each year you held that $25000 while waiting to buy the car, you will have earned $750 (assuming a 3% interest rate).
3. The hybrid approach: Having saved ahead of time, you consider various options. You've searched for the dealer with the best price, and maybe are paying $22,000 instead of $25,000. Next you find a loan possibility where the interest rate you'd pay is well below the rate you can earn in some investments. So you take the loan, investing the leftover money after the downpayment in those investments, using money from that investment to pay the loan payments. In addition to earning the money ahead of time (for example, the $750/year mentioned above) if you're careful the car loan might be at 3% while the investment might earn 6%, and your investment gain comes from the differential between those rates.

The point to consider here is the total cost:

total cost = base cost +/- interest paid/earned

In other words, the difference between these three scenarios is whether you're paying interest, or earning it. In scenarios 2 and 3 the total cost is reduced, so you are paying less than the base cost of the car and thereby amplifying your life force. In scenario 1, the typical one followed by people, you're paying more than the base cost, which just adds to the life burden required to own that car.

Let's try on another principle

Being financially smart directly contributes to your life force, while financial dumbness directly diminishes your life force

You can be as I was, financially dumb, and waste away a large amount of your life paying interest to your debtors. At its height, my debt cost $7200/year in interest, or about 1 months salary per year (at my then-current salary). You can learn to play the game and twist it to your benefit. It's just a game, there are rules about all of this, and you can maneuver yourself through the game. Maybe this phrase can become your hallmark:

The rules of the game have changed, for me. No longer do I pay them, now they pay me.

Can you feel the power in that? It's sure an interesting claim, yes? By learning the ropes of the game you can work the rules so that the "lenders" end up giving you money or gifts, at no cost to yourself. How? Simply have a card that pays benefits, such as airline miles, and use the card, paying it off religiously and completely every month. You won't pay any interest fees, but the airline miles (or whatever the card gives you) accrue the same anyway.

Here's a related principle:

You have a choice of monetary roles: borrower, owner, or lender. Your primary role is up to you.

When you carry debt, whether it's a house, car, credit card, boat, etc, that's obviously putting you into the role of borrower, and the interest you're paying adds to your life burden, diminishing your life force. With these debts you have chosen this borrower role through making purchases you can't immediately pay for. Clearly you can make other choices with your money. For example you can put money in a savings account, money market account, savings bonds, municipal bonds, or other types of bonds. In such a case you've chosen the lender role, and suddenly it is you who is earning life force off of other peoples work. The poor bums. You do run a risk of loss if the borrower decides to default on the loan, don't you? Another choice you can make is mutual funds, direct stock ownership or other types of owner activities. Depending on the type of those investments you may, or may not, earn direct income, and you run a large risk of complete loss should the business go bankrupt. In the meantime you hope the business does well and that the stock price rises letting you later sell the stock for a gain.

You can try out this lender role by stepping into the shoes of your credit card company. Their asset is a pile of money, and they earn their living by lending that asset (the money) to other people, and charging those people interest for the priveledge of being a borrower. In other words, the credit card company role is obviously that of lender. Money (hence, life force) flows to the lender. The lender then is pulling life force from others. You can play this role as well, simply by looking at your money as an asset to be invested most wisely.

How can you be a lender? Simple, just make any investment which involves debt and pays interest to you. For example, savings accounts, money market accounts, savings bonds or the other types of bonds. They all involve you lending money to someone else, and they're paying you some interest for that priveledge.