A long time ago in a galaxy far, far away…
…We taught our kids how money worked, and the importance of money to family financial strength and independence. Because I grew up fairly poor I can tell you that our “net worth” should certainly not define our “self-worth”, but the stark reality is if you don’t have any money feeling good about yourself is very hard. Further, being in control of your finances goes a LONG way to eliminating the number one stress from our lives: money. Recognizing this handicap of financial knowledge and the stress it causes, I made a decision to create a list of the Top 7 financial insights people need to be successful. If any household would practice all 7, I estimate they will easily beat 70%-90% of their respective peers in net worth, and likely boost their self-worth in the process. I firmly believe it will help you, but I also encourage you to send these letters on to your children or people you love to help them. This letter is the first in the series and it’s on DEBT. You must control your debt.
“Debt”, you say, “That’s not an investment!” That’s technically true, but recognize that on average, debt is an anti-investment. It is technically true, however, that one person’s debt is another person’s investment. An example will make this clear;
- If you borrow $200,000 at 5% for 30-years, you pay out $386,512
- If you invest correctly, and make say 6% for 30-years on $200,000, you end up with $1,148,698.23
- The above difference is $1,535,210
- Compare that difference to the median total retirement savings per household in America, which is $76,000.[i]
We’re not dead before we get out of the gate, but we should grasp that the only person who thinks debt is not a problem is the United States Federal government, and as I said last month, that’s a problem whose time will come. For the average person, too much debt hurts us long -term.
I next urge you to recognize that the level of Credit Card debt in this country is near an all-time high of $1.13 Trillion[ii]. Of that total, over the last year, roughly 8.9%[iii] of credit cards moved ‘transitioned’) into delinquency, and the average interest rate on unpaid credit card balances was 22.75%. You may think only a few people experience that debt, but last year 49%[iv] of all credit card holders carried a balance for at least one month. The average investment portfolio should do between 5.3% and 7.4% in return per year. Given that math, there is NO credit card company that wants people to pay off their credit card. They are making far more on the unpaid credit card than they would ever make in the market.
The well-known financial guru Dave Ramsey thinks all debt is bad and you need to eat ramen noodles until they are gone. Personally, I don’t hold that point of view and could give you 6 reasons for this disagreement, but let me just say homes go up in value and are generally good items to borrow on (more on that in a future letter). Cars and clothes, however, go down in value and we need to be very cautious we’re not conflating “need buys” with “ego buys”. You should never borrow money to buy either…unless the interest area is 2% or so under your investment return rate (see above). For that reason, households with a mortgage interest rate of 2.5% – 4.0% are looking like economic superstars at present.
Finally, the TOTAL DEBT PAYMENTS we can handle is commonly recommended at 28% of our monthly gross income for homes and 8% for everything else (Student Loans, cars, lay-away items – another bad debt approach), or 36% absolute max for the combination. Believe me when I say that every financial institution in the world knows those ratios about you even if you don’t. Loaning money might not be the oldest profession in the world, but it’s been around a long, long time and they know all the numbers. Out of your gross income, taxes are going to take 20% plus or minus (sometimes far more) and you simply need enough money to enjoy life. If you are tapped out on debt, you simply can’t save money (which is another financial Top 7). If you have your financial ratios right, and your pay your bills each month, anybody (literally, anybody) can get an 800 FICO score. With a score at 800, it helps on mortgage loans, apartment rents, and even life insurance rates.
Too many investors focus on investments and not on debt. However, as hopefully I’ve shown above, one is just the flip side of the other. If you want financial independence and less stress, rule #1 is to control your debt or debt will control you. You simply cannot get wind in your sails if you are always having to pump water out of your boat.
It remains my deep and distinct honor to serve you well.
Patrick Zumbusch
Founder and CEO
[i] “The assets households own and the debts they carry” (Rakesh Kochhar and Mohamad Moslimani, Pew Research Center, December 4, 2023)
[ii] “Average consumer carries $6,218 in credit card debt, as more borrowers are falling behind on their payments” (Jessica Dickler, CNBC.com, May 16, 2024)
[iii] “Average consumer carries $6,218 in credit card debt, as more borrowers are falling behind on their payments” (Jessica Dickler, CNBC.com, May 16, 2024)
[iv] “Average credit card debt in the U.S.” (Constance Summer and Poonkulali Thangavelu, Bankrate.com, February 14, 2024)
