Paying interest. Debt. Payments. These words for many people are horrible things. I really think most people walk around in the world thinking that loans are a horrible thing, being in debt is a horrible thing, and that companies who charge interest are evil. I really blame a lot of Christian teachings for creating this type of mentality. Debt is like anything on this earth, you have to use it responsibly. Just like wine is not evil, debt in itself is not evil. But both, when use irresponsibly, can destroy peoples lives.
So what is responsible debt? Responsible debt is debt obtained to make you more productive in the future, simply put, by obtaining this debt now you are actually making yourself more productive in the short-run, thus making more money in the long-run. For example, I took out a $8,000 to complete grad school. I needed it to cover housing costs. So I completed a nine-month grad school program, thus upping my salary potential immediately after graduation. After graduating, I started paying $100 a month for the next 10 years (and that's when most people choke on anything they're eating). But I have to say, it is worth it! If I had taken a break to work, I would have lost time, not to mention I would have to quite working to go back to school, etc. And since I have the degree, $100 a month is much more affordable than if I didn't have it.
What would be an example of irresponsible debt? How about taking out $100,000 for a B.A. for a degree that will only give you about $36,000 a month (anything degree that ends in "ology" or "studies" falls into this category). So you are making $3,000 a month, and you are paying $1,000 a month for the next 10 years to pay off that debt. Just ask yourself if you could be making $2,000 without the degree... probably.
So you get the picture, I will go deeper into responsible and irresponsible debt analysis later. What I want to get into is interest and insurance.
What is interest? I is the price of using money today, instead of waiting till next year. That's it. You may have the money next year, but you need to finish college this year, so you take out the loan, and go to college today. Well someone didn't get to use that money this year because you were using it. Nothing's free. You need to compensate them for using their money. And that is interest. You don't get mad paying for milk you buy at the store, you shouldn't get mad about paying for money that you don't have today.
What is insurance? It is the price of not having to pay money in the future. Say what?! Yes, think about it. It is a hedge against having to pay a huge lump sum in the future giving something happens. And obviously, because you may never use that money, your insurance payment is based on the probability that you will. In essence, you are throwing your money into a hole. But everyone does it. AND THEY LOVE IT! A lot of people look at what health insurance package they get with their job. We insure our house, we insure our cars, we insure our jewelry.... Its a huge chunk of our salary... and we will probably never actually use it. Probably. We are all living in fear that we might. So we happily pay monthly to ease our minds.
Now I'm not saying we should stop paying insurance. But I think we need to re-think what we are insuring. Yes, I need to insure my house, because I can't afford to make two payments on a house (one get's destroyed, so I have to buy a second one, and pay off the first one). But what if I could? Should I live in fear that my house would get destroyed?
What about our health care? Nothing is more complicated. You have to pay $150 a month, and that gives you a $6000 yearly deductible, but if you go do the doctor for a visit, you have a $20 co-pay, and if you get a prescription its a $7 co-pay, and you get a free yearly checkup, etc. And we pay over $1500 a year for this? I'm young. I don't go to the doctor, and when I do, I think I would probably come out paying less than $1500 in a year.
The fact is, for young healthy people, our insurance should look like this: If you end up paying more than $20,000 over a 12 month period, call us, and we will pick up your tab. Why $20,000? Because that amount I could afford to make payments on, with interest for about $350 a month, for 5 years. I would actually end up paying for the medical care you use. You would also shop and negotiate a lot more (so costs would go down). And not to mention, your insurance premiums would be a lot lower. How much lower, well it would be based on the probability of you going over $20k, my guess that is pretty low.
So why don't we do this? Because it is not lawful for insurance companies to offer insurance like this. Yes, we needed healthcare reform. We needed less regulation, not more. Here lies another example of how the free market didn't fail, but rather it was messed with, and the situation got worse, so we continue to regulate it hoping to fix the darn problem. And of course, it just makes it worse. So what is the source of our problems?
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