Do you consider “debt” to be a 4-letter word?
It’s funny how people view this concept.
There’s credit card debt, and this one is often the culprit for the persuasion that debt is bad.
There’s student loan debt. This one isn’t very popular, either.
Medical debt? Another rough one.
But let’s look at this from a different angle.
Imagine that you are a business owner.
You have employees.
They show up to work.
They generally do stuff that makes your clients happy enough to pay you for your goods and/or services.
You’re making money.
But one day, you look up from your desk to see your employees lined up at your office door.
Are you going to pay them?
Of course, you are. You are indebted to them for their time and work.
Taking out your checkbook and a pen, you begin cutting their paychecks.
It’s been a 40-hour workweek, so you write each one a check for…
“But minimum wage is $7.25 per hour!!!”, you say.
Checking your math, you see that you’ve paid each employee $0.51 per hour.
What kind of tyrannical boss are you?
You’re a landlord.
And oddly, your employees don’t seem to complain. Why is that?
It’s because they are dollars.
In this example, we took the median home price of a house in Houston, about $250,000 (at least at the time this was written), and putting down 20% or $50,000, bought the house. We took out a loan for $200,000 for 30 years at 3.75% (which are real rates right now).
After 30 years, our total payments will be $333,443.23.
Of that, $133,443.23 will be interest payments, and the other $200,000 principal payments.
For 24 hours a day, 365 days per year, for 30 years, those 200,000 dollars are going to work for you.
So, where did the dollars come from?
These dollars that are working for you, where did they come from?
Well, where did the bank get the dollars?
“From the depositors.”
And where did the depositors get those dollars?
“That was what they were able to put into savings or investments, right?”
How did they get those dollars to invest?
“Probably their jobs.”
Their payment is a reflection of the value they were able create with the hours of life they have been given.
When they choose to invest their profits (the money left over at the end of the month, or, perhaps, set aside before any other expense lays claim to their income), they are creating additional value out of the harvest of their hours.
By borrowing their money, you are leveraging their time. And just like the employees in our scenario, you are in-debt-ed to them.
Using a mortgage calculator, like this one, you can see what your total interest payments would be on a loan. To see what you’d pay in interest per hour, divide the “Total interest” by 262,800. (This doesn’t account for leap years).
Every month is also, on average, adding $555.56 to your net worth (most mortgages are weighted to have more interest at the start of the loan per month than principal, but it averages out if you hold the house the whole term of the loan). This is before cashflow on a rental, or appreciation of the property.
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