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Len Penzo dot Com

The offbeat personal finance blog for responsible people.

Condition Yourself to Hate Paying Interest

By Len Penzo

God, do I hate to pay interest! To anyone. For anything.

I abhor paying interest, and I avoid it like the plague! You should too.

I think that most people who currently enjoy a life of financial freedom have this distaste of interest payments hard-wired into their brains. I am absolutely convinced that this trait must be present in any household CEO who insists on running her household like a well-run business. If the trait isn’t inherently present in the household CEO, then it must be learned. Otherwise, the odds of achieving a life of financial freedom will be long indeed.

And remember, just as it is true that you do not have to be rich to be financially free, it is also a fact that wealth does not guarantee financial freedom. The sad case of Ed McMahon is a prime example of a supposedly wealthy person who is actually far from being financially free. Most people like McMahon, who find themselves in the ironic position of being indentured servants despite their high incomes, can trace their predicament on a general apathy towards debt and the insidious interest that comes with it.

And before many of you start banging on your keyboards to say I am being too militant regarding debt, I will say that I do not avoid debt entirely, as I could not have bought my home without a loan. But that’s the only interest I pay. And I am making extra payments on that loan in order to ensure that the home loan is paid off before my first child graduates from high school.

To me, it is perfectly acceptable to pay interest on a home loan, assuming one does not buy more house than they can truly afford (to me, that means your debt-to-income ratio for housing expenses does not exceed 28%).

I understand that there will be different circumstances for different people, as some of you will need to take out loans for education, a budget-appropriate automobile, medical emergencies, and other items that are considered needs for your household. But the savvy household CEO understands that the power of compound interest cuts both ways and, therefore, always thinks long and hard before agreeing to take on any additional debt.

In the end, those of you who are successful in minimizing the amount of interest you pay to your creditors will also be successful in managing your household finances and attaining a life of financial freedom!

January 4, 2009

Comments

  1. 1

    Jarrett Browner says

    Don’t believe them when they say “NO CREDIT CHECKS”, they do credit checks as well as confirm your bank account is legitimate, open and in good standing. If you have a negative amount or a very low amount, they will deny. Please, try to stay as far away from them as possible. They are nothing but bad news!! Wolves in sheep’s clothing.But if you feel you must have a pay day loan try CashNetUsa. But only borrow what you need and pay it back as soon as you can and then forget about pay day loans.

  2. 2

    Tom Schaefer says

    I am somewhat puzzled. I read a few posts on your BLOG regarding when you purchased your new Honda (1.9% 5 year loan) and the above regarding interest. I can only assume this article predates that one. The case you made in you car buying article that the interest was 1.9% is quite valid. Yes, you can make more in a good investment over those 5 years than 1.9% so that is financially sound. Of course, I realize some will comment on the wonderful feeling of owning your car outright, but when one can really afford it (and is not shopping by car payment), an interest rate lower than your investment return is a SOUND financial vehicle–presuming you would have paid cash otherwise.

    I state all that as it seems your own example of purchasing a new car for 1.9% has to soften your militant position on interest. Maybe the answer is to clarify GOOD interest versus BAD interest.

    I enjoyed the article so far.

    Thanks,

    Tom

    • 3

      Len Penzo says

      Great question, Tom. So much so that this will be the topic of next week’s main post.

      Briefly, for now: There has always been good interest and bad interest — although it is more commonly known as good debt and bad debt.

      That being said, since writing this article, our economic situation and domestic financial policy have become, shall I say, a bit perverted. So much so that traditional — and previously sound — money practices have been turned on their head in some instances.

      As such, what made little sense a mere five years, now can be a smart move — and vice versa.

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