This is the final part of my three-part series, How to Get Rich (And Stay that Way). Part 1 covers four principles to avoid wealth-destruction, Part 2 discusses how to make more money, and here in Part 3 we talk about why a philosophy of zero debt makes sense.
If it wasn’t for my wife, I wouldn’t have a personal credit card.
“But what about the POINTS?!”
In 2001, MIT published the results of a study that showed people will spend up to 100% more when using credit cards to pay instead of cash.
We may get 1-2% back in points, but we’re spending far more because we’re using a credit card.
If you use a debit card and you have $5,000 in your checking account, you will spend less than if you use a credit card because of the delayed pain of the purchase (paying off the credit card in the future).
I used a debit card for about 10 years, well past when my net worth grew beyond one million dollars.
I finally caved in and started using a low balance limit credit card because my wife agreed to manage it for me. I believe she is one of the 3% or so of the population who is disciplined enough financially to check the credit card every day, carefully manage it, and possibly not overspend. (But this is rare – assume it’s not you. It’s definitely not me.)
If at all possible, I recommend a policy of zero debt. Zero credit card debt. Zero mortgage debt. Zero car debt. Zero debt of any kind.
Yes, I know if you have a mortgage with a 3% interest rate, you can earn more in the stock market over the long-term (around 7.5% adjusted for inflation).
But you’re not a rational, number-crunching robot.
You’re human.
If you knew you had to pay cash for a house because you too believe in zero debt, you will get a smaller house.
A $750,000 house sounds great if you can get a 30-year mortgage for 80% of the price and only pay $3,000 a month.
It doesn’t sound so great if you literally have to come up with $750,000 in cash.
What does sound nice? That $300,000 condo in the same area.
The 4.5% spread between what you could earn in the stock market and your 3% mortgage on a $750,000 house means nothing when you compare it to buying a house that’s HALF the cost because you pay cash.
(Note: This isn’t just theory, it’s literally what we did. We went from owning a $3.1 million home with a $2.4 million mortgage to paying cash for a $950,000 house. Life is so much less stressful now because our monthly expenses are almost nothing.)
Plus, your property taxes are lower, your maintenance costs are cheaper, and you have less room for more stuff, saving you even more money!
You’re making more money, spending less, living with zero debt.
Summary
As obvious as it sounds, the key to financial freedom is to spend less than you make.
The problem with this common advice is we don’t like to wait. Most of us don’t want to wait 30+ years to be wealthy. We want it now.
Great, you can do it.
But, be smart. Save a significant portion of your income (at least 30%).
Be aware of the fast adaptation to higher income. For example, if you ask someone who makes $20,000 a year how much is enough money, they might say $80,000. If you ask someone who makes $80,000 a year (four times more) how much is enough money, they might say $250,000. We always want more.
No matter how much we make, more sounds like the right amount.
We must learn to desire less than we make. Only then can we become financially free.
Make more money. Start a business, ask for a raise, become more valuable, or get rid of the stuff cluttering up your life.
Spend less. Downsize. Stop buying stuff that doesn’t make you happy. Live simply. Cut the waste.
Then invest the difference in relatively low-risk investments (over the long-term) like index funds and higher risk, higher return investments like starting a business of your own.
Soon, the amazing effects of compounding pay off and you’ll be free.
Don’t gamble. Don’t buy Bitcoin. Don’t trade stocks. Don’t follow the herd.
Spend less than you make. Invest the difference.
Then use your financial freedom to change the world.
I’m excited to be on the journey with you.