Most people take mortgages, car loans, and credit cards as a necessary part of modern life. However, these debts usually stick around for the long-term. They are rarely ever resolved or fully paid. The consequences of long-term debt can be very severe.
The first consequence of long-term debt is that it causes you to pay 3 to 4 times more for the object you are buying or greater. Four instance, take buying a home on a mortgage as an example. A modest home may sell for $100,000. People who pay their home with a 30 year mortgage will frequently pay 3 to 4 times this amount. They could end up paying $400,000 for the same property- sometimes even greater over time.
Imagine the difference of paying cash through careful investment. You could buy four homes for the same price. Then, you could rent out the other three and receive a hefty passive income each month. The consequence of long-term debt is staggering. Over the course of an entire lifetime, you could earn up to $1 million of passive income from the three paid-in-full rental properties.
Another consequence of long-term debt is that it prevents you from learning about finances. This happens two ways. First, if all of your income is used on your personal expenses, you will never have the ability to learn from investing. The best school for investing is the school of hard knocks. You will never have this opportunity if all of your income is wasted by servicing debt.
The other consequence of long-term debt comes from it creating only “easy,” short-term options with finances. If you always take the easy way of obtaining what you desire through loans, you will never acquire a financial education. You will always take the easy, quick-fix instead of learning how to do things the right way over time.
Another consequence of long-term debt is that it will usually prevent you from becoming wealthy or building a net worth. If your income goes primarily to service debt, you will not be able to save or invest very much money. In fact, you may end up finding yourself going into the negative instead of the positive. If you go to far into the negative, you may end up needing to file for bankruptcy.