My New Views on Debt

[AKacres]

I was raised with "AVOID DEBT" as one of the most important rules of a happy and successful life. Be patient, save money, and then pay cash. I know it's a big thing always emphasized in the homesteading culture.
Now I'm reconsidering.
We're trying to get started on our land. Bought the land with cash, building the house out of pocket. It's still very unfinished. So much to do. It all takes so much time and money.
If we took out a loan to accomplish any of these projects (say build a barn) we could move ahead with our plans and we could enjoy having the barn and related animals now. Rather than just a hope/plan that may not occur till the children are teenagers, if then. And hubby and I will be in our mid-50's.
I guess what I'm saying is that assuming there's a steady income, I'm thinking it's worth the extra money we'd pay in interest to have the current use/enjoyment of the thing we borrow money for. They say life is what happens while you're making other plans.
Also, the interest banks pay on savings accounts is so laughable that there's no way it can keep up with inflation. Say it would cost us $20,000 to build a barn this year. Five years from now what will the same materials cost? Probably not less.
The kids keep growing up and getting bigger, and we won't be able to go back and replay their childhoods.
Does this thinking make sense to anybody else? Any comments/experience?

[TnAndy]

We have always avoided debt whenever possible, but there are some things, IMHO, worth going into a reasonable amount of debt over. Property/home/etc is one of them.

That said, you can still minimize the amount you need to borrow by doing the construction yourself ( we built both of our homes ourself ), and in the case of ag buildings, if you have timber on your property and can log/saw it out, you can even beat some of the construction costs.

Also, understand compound interest, and the earliest money you pay back reduces your total interest paid the MOST.....so load up on payments early on, and turn a 15 yr loan into a 7-10 year one....and save a ton of interest payments.

[macmad]

With debt comes risk, so have at it if you are comfortable with that level of risk.

For most of us, a great deal of patience is the unwelcome partner of not having debt.

[DEKE01]

I hate debt and avoid it. But I make a few exceptions on appreciating assets (your home usually), income producing assets (perhaps your farm, barn, and tractor applies), where the interest rate is so low my cash can earn a better return (the last time I purchased a new car in 2000, the interest rate was subsidized down to about 1% by the manufacturer), or if buying it now on debt will save me money in the long run. The last one has only ever applied to me in my business where we would stockpile certain parts knowing that future orders where coming.

[mnn2501]

There are some valid reasons for debt and what you mentioned is one.
I would caution to have a goodly amount in savings and then keep the debt as low as possible. Debt should only be used for items that appreciate in value or that will earn you money. Your barn sounds like it will do both, so its a good candidate for reasonable debt.

Talking about debt J. Reuben Clark Jr. described it this way: “Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.

[ct01r]

I agree that sometimes debt is worth it, but we usually make extra paments on the priciple early on and save thousands down the road. It sounds like you're doing the smart thing, analyzing risks against benefits. A barn would help secure livestock, which would make you more independent (and sooner), versus relying on stores, etc, to provide food. As long as you're careful, I don't see anything wrong with limited debt. Curt

[Nate_in_IN]

Debt is a legitimate tool to be used. In general I try to avoid it, but it does have it's places to be used. The best place is where the return on investment warrants it. For instance to purchase land, which appreciates, or on education which increases your income.

Not trying to sway your decision, but it is probably a good time to borrow on a fixed rate loan. I really see no way for our nation's government to continue without generating a large rate of inflation. Inflation helps the debtee (you pay the bank back with cheaper dollars than you borrowed), but watch for variable rate loans.

[Maura]

Go to the banks, more than one, and find out what kind of loan you can get to fix up your house. What you can get to finish the house and build a barn. Don’t disregard hiring labor. Ask for a loan that will cover having professionals build for you. This way, you can get paper in hand on what Joe the Builder will charge for what you need done. They are unlikely to just hand you the money. You make draws on the loan as you need it. So, you have a guy tile the bathroom, but you hang the drywall yourself. Use the loan money to pay for the tile. You contract a drywaller to come in and drywall the house, pay him, do the paint yourself. Now, you have the house finished and are only paying interest on what you actually spent. Now, you can enjoy your house. Pay on the loan for a couple of years, build a chicken coop if you want, then go back and borrow money for the barn. By finishing the house you end up proving yourself as a borrower because you have been paying promptly on the loan. By waiting a bit for the barn, you’ve had time to rethink what you and the kids really want and need (could be two different things) and you’ve been able to save a few bucks in the two years you’ve waited. If you end up loosing your current job and having a few months with no job, you have a smaller debt every month at the bank (and they may work with you if you contact them right away).

[1shotwade]

What has been the best for us is to separate "needs" from "wants". You need food clothing and shelter. You "want netflix,internet,and a new car.Much of the time we get caught up in all the nice things around us and forget they are not "needed".
I could sure use a new tractor,but I really don't "need" it but I really do "want" it.Years ago living in a mobile home with 3 kids. we "needed" more space. The kids are grown and gone now so we now have more house than we need.This is the other part of the equation. The only constant in life is change.Now we would be much better off in a 2 room cabin than in this big house.
No one can answer your question but you.Weigh your needs against your wants keeping in mind how things will change by the time you get there.I couldn't wait to retire so we could get an RV and travel but by the time we retired I lost the interest and energy to travel.
Good luck!


Wade

[lmrose]

I grew up with a Dad who was left with debts to pay that my mother incurred before she left us. We lived barely hand to mouth because Dad had so many debts to pay. I swore I would never have a debt. Many years later married and with four kids to support we had to go in debt to buy our farm. We paid off the loan in ten years with both of us working. It was a struggle and all the kids were grown when the debt was paid. We have never had a debt since and will go without before incurring one. To me a home is about the only thing worth going in debt for as it appreciates in value and everyone needs somewhere to live Then pay it off as soon as possible.

[Terri]

At the rate that I was saving, I would not have been able to pay cash until I was too old to work it. Unemployment happens, bad health happens life happens!

I have a mortgage.

While I have not been able to afford to do everything that I intended, I have done SOME of what I intended. And, my kids grew up playing in a creek, with pets and room to run. I have NO! regrets!

[farmerDale]

I grew up in a family that was very debt averse. It held back what could have been built into a fabulous farm, with a bit of debt. I started farming by avoiding debt, as I was taught. For the first decade, my wheels spun, I never grew, and I sat there stagnant. FINALLY, I took on some land debt, and a bit of machinery debt. My farm grew, and with this growth, the payments got easier, and our life more comfortable.

Debt that is taken on that offers a return on investment is smart and often necessary debt. My debt is life insured so that if I were to die my wife would have a bunch of land free and clear, don't forget to take care of those little details which may seem wasteful or small, but are in my experience a no-brainer.

Making money by using money from a lender to become more efficient and grow a business, that you would otherwise wait a lifetime to achieve, is money well borrowed.

Debt for vehicles, debt for frivolous items, debt for non cash flow producing items are different.

There is good, smart, and well used debt, and then there is useless, zero or negative return debt.

It is not as clear cut as debt vs. no debt. All I know is because of my forefathers aversion to debt, even for land, and having been taught that debt is wrong and pretty nearly evil, I was held back from positive growth and efficiency gains on my farm.

All this said, moderation is key as well. I would not borrow enough money that if interest rates went to double digits or beyond, it would have much effect on my balance sheet/ repayment ability.

Fear of smart debt can delay for years, and hold one back for half a lifetime from gaining efficient returns, and growing a business.

[JLMissouri]

I think debt used wisely is okay. Using it wisely is key, it is easy to go overboard.

I have never owned a new car, My current ride is like new to me even though it is 22 years old, usually I am literally driving an antique. About the only thing I buy new is undergarmets and clothes, everything else is usually bought used, excluding consumables. I have had some good paying jobs, but still spent frugually. I was debt free with 6 acres, but wanted to be in the country, and decided to borrow to buy some land. That was four years ago, and I am happy I made the choice. I agree it is sometimes worth going in debt, especially on investments that pay back. I intend to return to my debt free status as quickly as possible.

[where I want to]

I think it's more likely that inflation rather than deflation will happen. As long as you crunch the numbers, including things like extra electricity for lights, increased property taxes and insurance and you can get a fixed low rate,, it is likely that you will do well right now.
But I would try to get a long a loan as is reasonable with no prepayment penalties. That way the monthly payment might be low enough that you can still make the payment if you have a financial reverse but then you can also pay it off as soon as possible if you're doing well.
The worse thing to happen is that interest rates on your loan go up and up. I remember a period of loan rates goung into the 20% range and that was a killer. It's made me very wary of variable rate loans.

[Awnry Abe]

You are comparing the "now" of debt free vs. the "now" of in debt. You need to compare the "now" of debt free to the "tomorrow" of in debt. Pay now or pay later. Either way, you pay.

[Wolf mom]

What frustrates me is to see so many elders that are sitting on hundreds of thousands of dollars by believing being debt free is the way to go & not having a mortgage on their house and now living day to day poorly. Unable to pull money out of their house as their only income is Social Security and reverse mortgages are really bad financing options.

[SteveD(TX)]

Most wealth is built through careful management of debt. You must be selective though and not overburden yourself. There comes a time in most people's lives that it is best to avoid most types of debt, however.

[Grandmotherbear]

My dad was an economist and he believed strongly in manageable debt- education, land, home, tools needed for making a living. Excluding personal automobiles.
His per centages are I believe no longer applicable, but I was raised with 25% monthly income shelter (mortgage no more than 3x annual salary) 20% savings split equally between semi annual and annual expenses, and free and clear savings; 20-25% food and entertainment, the rest for debts and recurring monthly expenses. Seems to me that everything was a lot cheaper then too.
When I married Grandfatherbear he had never had a debt- he rented an apartment from an aunt for cash, bought his cars for cash from his mom or an uncle, had his tuition paid by his parents, paid cash for all food and clothes and auto expenses- I mean CASH- big wads of $20 bills. His father fronted the finances to rebuild his grandmother's house he inherited, we paid him back. I had to put the utilities in my name because he had no credit. I had to finance the cars we bought later on in my naamme because he had no credit. He has slowly built his credit up but had he ever had an emergency prior to marrying me where he NEEDED to make time payments he would've been paying an outrageous interest rate because he had NO credit istory.
I believe you have chosen a wise approach to indebtedness to finance home and barn, but pls put death and also disability insurance on your wage earners- manure happens all the time.

[rambler]

Consumer debt is a bad trap.

Transportation debt is questionable, folks seem to buy prettier and extra features than they need on credit and pay through the nose for stuff they don't need. Bad deal.

Buying a permanent item, a house, a farm, a building on your property that will be used for 20-50 years, those are a little different to me. A person can use some credit to get those. It is helpful if they are at all money making, like the barn will help you fix things easier so you save on paying others, or I house animals that you can sell, or the property you buy will support crops or critters you can sell.

I don't suppose a 10 acre plot will soon be making a person money hand over fist, but if it can pay off the intrest on the loan and a few bucks, then the loan and getting th eoperation going while you can seems like a good use of loans.

If you are fiscally responsible and have no credit card debt, no car loans, then you probably are on a good frame of mind to make a property loan work for you rather than against you.

Paul

[Muleman]

Like all have said make sure it is needed debt and not wanted debt. Having said that I have always found money is easy to get, time is not. I will go into debt to accomplish things I need done in order to avoid wasting time. I think this is why so many grandparents spend so much time with there grandchildren. when they were young they avoided debt, did not have many things and could not share some things they wanted with their children. make reasonable debt, provide the things your children need that re time sensitive and have fewer regrets later.