When we were looking to buy a house for the first time , we didn’t know the first thing about mortgages. The thought of assuming such a large debt was frightening and we turned to our friends for advice ( There was no internet in those days ). Their consensus was :
1. Buy a house as soon as you can . House prices are appreciating steadily ( this was in the seventies) .
2. A mortgage is ” good debt” because it enables you to buy something you need and whose value is steadily increasing .
3. Don’t worry about the interest payments because they are tax-deductible .
While items 1 and 2 made sense , item 3 did not . We just could not understand the concept. $10,000 in interest would result in a tax deduction of only$ 2,500. ( assuming one was in the 25% tax bracket ) Why would one pay the bank four dollars for every dollar saved ? Shouldn’t one try to keep the interest to a minimum and pay off the mortgage as fast as possible ? Our friends tried without success to explain it to us in several ways . One of their rationales was that by making large interest payments we would somehow be sticking it to the government because our tax bill would be reduced.
Only one friend agreed that it made sense to buy a house that one really needed , to keep the mortgage payments small and to pay off the mortgage as early as possible . I’m glad I listened to him.
The April 27th issue of the U.S News and World report carried a very interesting article ” The Myth of Good Debt ” by David Francis. The article , also featured on Yahoo, completely overturned the old perceptions about debt. It quoted statistics that said the average U.S household income in 2010 was only $ 41,674 while the credit card debt was a whopping $ 15, 956. In addition, most Americans were paying off mortgages ( between $ 700 and $ 1,700 a month ) as well as car loans . Students graduating from a four-year college were saddled, on average, with more than $ 25, 000 in student loans . In the face of such crippling debt burdens , the old ideas about ” good debt” and ” bad debt” have been discredited. Nowadays , the thinking is that there is no such thing as ” good debt”; all debt is bad , though some of it is not as bad as the rest.
When I read the article , my first thought was ” Finally ! So we were not wrong after all !”
The idea of ” good debt” has been responsible for many of the problems we face today . In face of the constant barrage of ads touting ” Buy now ,Pay later”, many Americans have gone into debt not just for a house but for cars , vacations , clothes and everything else on their wish lists .Whether to keep up with the Joneses or out of a sense of entitlement , we seem unable to deny ourselves anything , to put off buying luxuries until can afford them .
Some years ago , there was an interesting experiment with a group of second graders . They were offered one piece of candy immediately, or two pieces of candy after twenty minutes. Fully two-thirds of the children opted to have one piece of candy now. We adults have not behaved any differently . The habits of thrift and frugality developed by those who lived through the Depression have been wiped out in the succeeding generations .
There have been plenty of people to steer us wrong . There was a time when spending was lauded because it kept the economy ticking . In the seventies through the nineties , the ” experts ” saw nothing wrong in the fact that Americans were not saving enough. Our savings rate was in the single digits while people in other countries were saving 15% , 20 % of their income or more.The public was encouraged to borrow to the hilt , live to the maximum limit on their credit cards. The results are illustrated in the U.S News article .
There are also other types of ” good debt “to be beware of . Previously , parents were encouraged to send their children to the best schools they could get into and never- mind – the- cost. Education loans were OK because they would pay off many fold over the course of a career. With the changes in the job market this is no longer true . A recent news report said that fully half of college graduates were unemployed or underemployed. And many of those who are employed find themselves unable to earn enough to pay off the loans even a decade after graduation .
The point is that what they ( the “experts”) say is not always true and many of their pronouncements are because of vested interests. What was true in the past is not necessarily true today because the world , the economy is changing so fast. It is best to think for oneself when it comes to making decisions about one’s future. It would also be beneficial to return to the old-fashioned virtues of frugality , thrift and self-denial that served earlier generations so well.
The new wisdom, it turns out , is very much like the very old wisdom .