4 Things I Wish My 20 year Old Self Knew About Debt and Money

My baby sister told me that she got her first official full time job. She is so excited to start working, as a professional, in a field that we both share a passion for. Accounting!

Then, she expressed that she couldn’t wait to be able to borrow money to buy a car.

That’s when my over protective, older sister mentality went into overdrive. This was the first thing I did when I started making money.

I was 20 years old, around the same age she is now. I wish someone would have told me what I now know about this decision…..

In an effort to help both you and my little baby sister. Here are some things I wish my 20 year old self knew about debt.

It will save you the 10 years it took me to figure it out for myself.

The poor use debt to buy liabilities

At first this didn’t make any sense. I remember being in accounting class at university and learning that things like a car and a house are referred to as assets.

So why were my finance mentors constantly calling them liabilities?

1. A car for personal use is NOT an asset

When you use debt to buy a car for personal use only, it quickly loses its value.

Infact, it is common knowledge that a new car loses 20% of its value every year. So after 3 years, the value of the car that remained would only be at 40%.

In dollar terms, a car that cost you $10,000 three years ago would be correctly valued at $4,000 today.

Yet, the nature of car loans, having some of the highest compounding interest rates, sometimes doesn’t even get paid off that fast. So you are left, paying for something that is already valued less than you owe for it.

2. A mortgage on a home, is NOT an asset

A house is another “asset” the poor constantly make loans to buy. But it can’t be classified as an asset, since real assets need to make you money.

A house doesn’t make you any money, unless you sell it or use it as a rental property.

Instead, you pay money from your hard earned wages, for years before you can fully call it your own. Interest payments, along with repairs needed, usually end up costing you more.

Mortgage payments are sometimes even higher than the rental fees for a similar property.

They usually have some of the highest interest rates on the market. So you are left spending 20 to 30 years of your life, paying for a place you never plan to re-sell, or make any money from.

I know a lot of people would disagree with me about this, but take some time to understand it. And maybe you come to the same conclusion.

The rich use Debt to buy Assets

Since we already established what the rich don’t consider to be assets. Let’s look at their strategies when using debt to buy the same things we just talked about.

3. When do Rich People Buy Cars using Debt?

Usually, it’s a rule of thumb for rich people, they don’t buy anything that is not an asset if they can’t afford to pay 10x its value in cash.

So now, if they have 10x the value, why would they even consider taking out a loan for it? Inflation- Baby! Yup, that thing you are experiencing right now, seeing the price of everything go up.

See, the rich know that by studying the movement of the market, they can borrow in times of low inflation, and pay back in times when inflation is high.

When paying back in times of high inflation, they will end up paying back the same amount of money. Yet, the value and purchasing power of that money would be worth less than what they originally borrowed.

4. How a Mortgage can be an Asset

4.1 Mortgages offer flexibility

Rich people can usually afford to pay for their homes in cash. Yet, because homes are so expensive, it means that a lot of their money would be tied up in the house. If a better investment opportunity comes along, they would miss out on it.

So they get loans on these properties to have access to more liquid assets. This allows them to take advantage of better opportunities.

4.2 Borrowing can be Cheap

When interest rates are low, at say 3.5%, rich people jump on the opportunities to take out mortgages.

So, instead of paying $250,000 for a house. They put a deposit on it for $50,000 and use the $200,000 to buy bonds or stocks which would give them a higher percentage pay out.

In that way, they are making more money from the $200,000 that would otherwise be tied up in the house. They use the money being made to pay off the interest of the mortgage. Smart right?

4.3 Mortgages offer tax benefits

Did you know that you can apply for tax deductions if you have a mortgage? Basically, most rich people keep a mortgage on their balance sheet as a way to help them pay less taxes legally! In Belize, this is also true.

Income generating expenses such as repairs, property taxes, insurance and mortgage payments present an opportunity for you to legally lower your tax rate.

But don’t take my word for it, ask your local accountant about this.

4.4 Mortgages are used to buy Assets

Rich people love real estate. They understand that it is one of the best ways to grow your money. It brings passive income, so that you can spend your time doing what you love. How does it work?

They scout out cheap undervalued properties. Put a small down payment, and borrow the rest.

Then, they go to work fixing up the property. Rent it, and make sure that it pays more than the mortgage payment.

This is a skill that takes some time to learn, but you can see how the approach is different. Poor people look for the nicest houses to buy, so end up needing larger, more expensive mortgages.

The challenge

Evaluate your debt. Are you using debt like the rich or like the poor?

Now try to figure out if there is something that you can do to change your approach if you are using it like the poor.