Saturday, January 17, 2009

Leverage = The Enemy

This whole financial crisis is the result of only one problem really. Too much leverage in the system. People borrowed money on the assumption it would always be available and they could delay paying it back indefinitely. That is never true. My advice to the extent you can follow it is to reduce leverage as quickly as possible over your lifetime. Pay down your house if you can. Pay down those student loans. Never carry a balance on your credit card. Don't have a car loan. Only buy what you can afford. I have always followed these rules, but I must admit on the house I did wonder if I was doing the right thing by paying down as much as I could (not fully there yet). The government does incentivize me to NOT do that by making the interest tax deductible. But, it is still the right thing to do. Even now, when you can borrow as cheap as ever and house prices are no longer absurd, I would still advise paying it down. The piece of mind of owning your home is worth it (or at least I hope it is) and once you have paid it off you can build wealth with a safety net under you.

4 comments:

private investment funds said...

Interesting, I have no credit card debt, moved 18 months ago, sold a house at the height of a market in a hot area, moved to less hot area and cut down the money owed, sold my business and cut down more on money owed. Thanks heavens I did it 18 months ago....

krishna kashyap av said...

Yes greediness is the cause for every bad thing.. Thanks for the rules to follow..
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Debt Settlement Lawyer said...

I agree, one should not take a loan for luxuries if he finds it hard to return it back later on.