Sir William Wallace was born in the 1270s (the exact date is disputed). Barely reaching the age of 30 before his death, he led a resistance against the English occupation of Scotland. His story was told in the 1995 movie, Braveheart, starring Mel Gibson. The intensity and single-mindedness of Wallace in his fight against the English reminded me of the intensity we should bring to fighting bad debt. Let’s take a look at a short clip from the movie in which Mel Gibson delivers the famous Freedom Speech, and then we’ll return to the issue of fighting bad debt.
It’s time to declare war on bad debt. It’s time to paint our faces, take up our swords, and fight bad debt to the death. Are you with me?! Now before we charge the enemy (no pun intended), we need to make sure we’re all fighting the same nemesis.
What is “bad” debt?
Bad debt takes many forms, and even includes certain home mortgages. Here are several examples of bad debt:
- Consumer debt: Any consumer debt is bad debt, period. Whether the debt was used to buy dinner, a vacation or furniture, consumer debt is our #1 enemy.
- Car loans: Money borrowed to buy a car is bad debt. Why? Because it represents borrowed money for an asset that depreciates in value. In addition, we tend to overspend on cars because the monthly payments are” manageable.”
- 401(k) loans: Even though you’re borrowing from and paying interest to yourself, 401(k) loans are a no-no. They take your money out of the stock market, decrease your monthly cashflow, and redirect interest payments that could go to pay down other debt or to new investments.
- Home equity lines of credit: Easy credit encourages one to make bad purchasing decisions. As easy credit goes, home equity lines of credit are the ugliest. Interest rates are often low and sometimes tax deductible, all of which can prompt us to make some really bad financial decisions.
- Certain home mortgages: Home mortgages with adjustable rates and “flexible” payment plans are usually bad debt. There may be some situations where an adjustable rate loan is best, but these are rare. Generally, anything other than a fixed rate home loan at competitive rates is bad debt. So is a mortgage that results from buying more home than you should.
If the list of bad debt seems overwhelming, imagine how Sir Wallace felt. As I’ve often reminded readers, nobody said this was going to be easy. There are many ways to tackle debt. But the first and most important step is to stop borrowing. As they say, if you find yourself in a hole, stop digging. If you want some articles to help you spend less and manage your money, check out these articles:
- How to Develop the Habit of Spending Less Than You Make
- 51 Painless Money-Saving Tips
- A Simple Approach to Budgeting
- 10 Online Budgeting Tools
But beyond budgets and frugality and planning is one critical step in the war against bad debt–determination. How determined are you to win the battle against debt? Watch Wallace’s Freedom Speach one more time, and then let’s go to war!
Stop borrowing now
The first act of war is to commit that you will stop borrowing money effective immediately. Yes, you need to go cold turkey. My wife and I committed several years ago that we would borrow no money except to remodel our home. We had just borrowed some money to buy dinning room furniture, and I knew in my gut that we’d made a mistake.
A few months later when we bought some furniture for our living room, the furniture company offered us credit at 0% for 12 months. I turned it down! Yes, I know it was “free” money, but it would have resulted in us buying more furniture than we needed. So we paid cash and bought less.
Cut up the credit cards
If you will succumb to temptation, cut up the credit cards. The easiest way not to use credit is not to have it available to you. Now notice I didn’t say cancel the credit card. You can certainly do this, but you should understand that it could negatively impact your credit score. Your credit score is based, in part, on the amount of available credit you have. Getting rid of your credit cards reduces your available credit. And your credit score will be critical if you ever borrow money to buy a home or start a business.
Sir Wallace didn’t fight alone, so why should you? The best place to start is with your spouse or anybody else with whom you share your finances. If you are both equally committed to fighting debt, the chances of success are greatly improved. Regardless, you should have somebody you can call or e-mail when you are tempted to buy something on credit. You need a life line. And if it helps, feel free to e-mail me (dr @ doughroller . net), and I’ll do my best to talk you in off the ledge.
And as a starting point, check out our recent series on How to Crush Your Credit Card Debt for more ideas.
Recognize the power of habit
Habits are powerful. Habits drive almost all of what we do from day to day. Some of our habits are positive and some negative. The bad news is that breaking a bad habit is not easy. The good news is that once broken, you turn a bad habit into a good one that is equally as powerful.
We don’t buy on credit anymore, and we don’t miss it. We don’t even think about buying on credit. We’ve turned a bad habit into a good one, and so can you. There are two important points to recognize here: (1) it will be painful at first when you stop buying on credit; and (2) it will get easier, much easier.
I hope you’ll make the decision to stop buying on credit. Trust me, your future self will thank you. And if Sir Wallace doesn’t provide enough motivation, then check out Rocky.