Life's Hidden Secret: The Empowering Freedom of Living Debt-Free

Debt defines your future, and when your future is defined, hope begins to die. - Kent Nerburn

When Bill Gates and Paul Allen initially started Microsoft, Gates was adamant about keeping enough cash in the bank to sustain the company for 12 months in the event that no revenue came in.

A rather conservative approach, but Gates had his reasons,

I was always worried because people who worked for me were older than me and had kids, and I always thought, ‘What if we don’t get paid? Will I be able to meet the payroll?

I’m reading Morgan Housel’s most recent book, “Same as Ever: A Guide to What Never Changes.”

In one of the chapters he discusses the idea of becoming a rational optimist.

One of my favorite quotes from his other book, “The Psychology of Money”, sums it up,

Save like a pessimist and invest like an optimist.

Without stating the obvious, and I know a few of you are rolling your eyes at me, I can’t explain the power of not having debt.

Now, I’m not a psychopath about this stuff. Debt can serve as a tool for growth, particularly helping you acquire larger assets such as real estate.

However, you can’t ignore the implications of taking on debt and how it impacts your overall financial picture.

You see it all the time - people overextend themselves, whether it’s real estate, credit cards, cars, etc. They may be able to go a few months or even years getting by, but then life happens.

Things break, you lose your job, medical emergencies, family stuff - whatever it is, all of a sudden that debt load you have been carrying limits your ability to withstand and survive these events.

Housel touched on this in a recent blog, “How I Think About Debt”.

Financial volatility is an obvious one – you find yourself unable to make your debt payments. But there’s also psychological volatility, where for whatever reason you can’t mentally endure your job any longer. There’s family volatility, which can be anything from divorce to caring for a relative. There’s child volatility, which could fill a book. Health volatility, political volatility, on and on. The world’s a wild place.

I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool.

But once you view debt as narrowing what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most: having options and flexibility.

You see people who are either ultra-conservative and would be content burying money in their backyards because it’s safe and they don’t trust anyone.

And others who spend recklessly, like a drunken sailor, without a care in the world.

But the power lies in the middle - again, becoming a rational optimist.

Having cash and liquidity gives your opportunities and flexibility. Whether it’s a real estate deal, a major decline in the stock market, quitting a job you can’t stand anymore - you are in a position of strength, not desperation.

Not many people are in this position. Their hands are tied and they are held captive to accept whatever is in front of them with not many options.

Take the stock market for example. By being in a financially strong position, you are able to withstand the big ups and downs. You are not in a position where you are required to sell to pay off debts or cover a margin call.

Remember,

“The first rule of compounding: Never interrupt it unnecessarily.” - Charlie Munger

Housel goes on to say,

So the trick in any field — from finance to careers to relationships — is being able to survive the short-run problems so you can stick around long enough to enjoy long-term growth.

I’m not recommending you take every dollar you make and keep it in cash. We fund life’s buckets around here and save with intention.

But over the years, I’ve become much more appreciative of having money that is always readily available. That helps give you options and allows you to be patient as an investor.

Sure, maybe it’s not earning the highest return, but having flexibility and options is priceless.

Remember what Charlie Munger once said, “The first $100,000 is a b****, but you gotta do it.”

Start positioning yourself now to become flexible in all areas of your life.

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

All investing includes risks, including fluctuating prices and loss of principal.