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In May of 2007 I fulfilled the American Dream by becoming a homeowner for the first time. And, like most Americans, I took out a sizable home mortgage to pay for most it.
I had grown up with the belief that there were two types of debt: good debt and bad debt. Good debt, as I was led to believe, was borrowing to purchase appreciating assets that I could not normally afford, like a house or other real estate. It could also come in the form of student loans or borrowing to start a business; essentially taking out a loan today so that in the future, one could earn a larger income than they could otherwise obtain.
Bad debt, on the other the other hand, was silly debt. That was purchasing an extravagant trip to Tahiti on your credit card or financing a TV and furniture with some big box store.
It all seemed rational enough. Smart rich people borrowed money to becoming wealthy and dumb poor people went into debt making foolish purchases on credit cards.
However, before the end of 2007, my views on debt and my entire financial trajectory changed completely.
Relentlessness
A funny thing happened to my attitude just a couple months after taking out my mortgage. Prior to 2007, other than a small car loan, I had never really been in debt before. Now I had a nearly $70,000 mortgage over my head.
What all of the proponents of the good debt/bad debt philosophy failed to tell me was that all debt is relentless. It doesn't matter to a bank if you get sick, lose a job or go through some other sort of personal crisis. When that monthly payment is due, it is due. And whether the debt is on your house, a car, a vacation or a boat, they want their money and they want it now.
Looking back, I wish I would have known how foolish I was. Had I suffered a major illness or had to deal with long-term unemployment, I would have been financially ruined in a matter of months, all because of what I had considered to be a good debt.
Shift in Mindset
By August of 2007, I began to toy with the idea of paying down my mortgage as fast as humanly possible. But at that time, it was very in vogue to plow money into the ever skyrocketing stock market. After all, since 2003, the market had done nothing but go higher and higher. I began to doubt my strategy of making extra payments on my mortgage.
I figured, why should I pay down a loan that is only costing me 5.75% interest when I can invest in the stock market and earn 15 percent every year!
Luckily, I had a good mentor that set me straight by implanting a very simple concept in my head. He said, "If your house was completely paid off, would you go to the bank tomorrow and take out a mortgage against it to invest in the stock market?"
Of course not. I thought what kind of idiot would borrow money from their home to speculate in a roller coaster investment like the stock market? As he further explained, I was that idiot. If I had chosen to invest in the stock market instead of paying off my mortgage faster, it was really no different than borrowing against my house to invest in the market.
At that moment, I my attitude toward debt shifted permanently.
Today
Now, nearly four and a half years later, I have a paid off my mortgage and am living 100 percent debt free. Let me tell you, of all of the financial decisions I have ever made in my life, the decision to become debt free and to stay debt free is the best.
Good debt of bad debt, life is so much simpler being debt free. I just wish the Alex of five years ago understood the good debt myth as well as I do today.
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