This post is part of the Debt is Not Forever movement led by Jackie Beck of The Debt Myth. Disclosure: This article is written for entertainment purposes only and should not be construed as financial or any other type of professional advice.
Over the past few weeks, I have thought about buying a second home and taking out a mortgage loan to finance the purchase. The payments would likely be about $200 per month as the house is small and located in a scenic but depressed area. Alternatively, I could sell investments and purchase the house outright.
I am out of debt now (and have paid off the mortgage on my primary residence) and would like to stay out of debt forever. Still, low mortgage rates are enticing, especially for a home that could generate cash for me in the future, possibly at higher rates than its borrowing costs. Right now, the house is simply on my radar and I am many steps away from making an offer (or borrowing to pay for the purchase).
It seems that we have been trained to borrow money rather than save and invest. Even those of us who are savers and investors barely think twice about getting a car loan, student loan, mortgage loan, home equity loan, etc., or putting charges on a credit card. As a result, we may (falsely) believe that debt is inevitable and forever.
My friend and fellow blogger Jackie Beck is on a mission to let people know that debt is not something we have to carry forever. We can save and invest, and spend from our wealth instead of constantly borrowing and repaying, borrowing and repaying.
As I’ve gotten more financially stable, I’ve realized that I can save and invest not only for small things, like a new pair of running shoes (which can range in cost from $50 to $200), but also for major purchases, like a new car (which could cost $10,000 to $20,000 or more).
Have you ever considered setting aside money for a major home improvement, for example, rather than putting charges on a credit card or taking out a home equity loan?
Here are a few ways to avoid debt by saving and investing:
Save and invest in a tax-advantaged account for specific purposes
There are a few types of accounts that have allowed me to grow money tax-free while saving for major expenses. These are retirement accounts, such as the IRA and 401(k) plan; college savings accounts, such as the 529 Plan and Coverdell account; and health savings accounts (HSAs) for health expenses.
So, a good place for me to save and invest is these accounts because I may be able to get tax breaks for putting money there; and funds can grow tax-free within the accounts.
Save and invest randomly
As you may have guessed if you read my article on financial goals, I have not really invested for specific purposes outside of college, retirement, and healthcare.
But I have saved and invested to build wealth, and then sold investments to generate cash to buy a car or make a home improvement (like new hardwood floors to replace worn-out carpeting).
Save and invest within a regular brokerage account for a specific purpose
One of the reasons I have started thinking more about saving with specific goals in mind is the design of the client interface within the Betterment website, which focuses investors on goals. Sure, I can simply “build wealth” but I can also name goals, like home improvements, an epic vacation, a new car, or a vacation home, and set aside money for these purposes.
As long as I hold funds in a regular, taxable account, I can generally cash out whenever I like. By investing for a long-term goal, such as a new car in 10 years or major home renovations in 15 years, I can work toward a specific result (such as $25,000 in investments) and have the means to generate funds to pay outright for a big purchase, instead of borrowing.
Whether I invest with Betterment or another broker, the idea of setting aside money for major purchases still holds. I don’t have to borrow to buy a new car or go to college, as foreign as that may sound.
The funny thing about the house is that I have imagined how this asset could boost my net worth and possibly position my family to avoid borrowing for other uses. After reflection, I realize that I can wait to make this purchase, especially if waiting means I can gain greater clarity on whether I should make this move at all, especially if the purchase means getting a mortgage. Carrying debt forever doesn’t have to be the norm.
What do you think about debt? Have you considered living without debt, either now or in the future? Consider participating in the #DebtIsNotForever movement and sharing why you’re aiming for debt freedom or why you got out of debt or expressing your commitment to eliminating debt from your life.