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Why You Should Avoid Debt in 2014

There is no question that we live in an inflationary environment.

Since World War II, prices have gone up almost every single year. Some years are worse than others. But even if prices are going up at 2% per year, it still eats away at your savings.

I will sometimes hear advice that it’s financially savvy to take on debt because you can pay back the debt with dollars that have depreciated. This can be right at times, but we also need to understand that it can be very bad advice in certain situations.

First, we live in an unpredictable world. We also live in a world with booms and busts, courtesy of the Federal Reserve and other central banks. While the general trends may be inflationary, we also see times when prices are stable or even pulling back in some areas.

Imagine the poor person who took this advice of taking on debt in 2005 in regards to buying a house. He thought, “I will just buy a house and pay back the loan with money that is worth less in the future. As long as it is a fixed rate loan, the interest rates won’t matter.”

But things wouldn’t have worked out too well with this strategy. It would have become evident in 2008 when everything came crashing down. In some areas of the U.S. you could have bought the same house for half the price in 2011 as would have been paid five years earlier.

The point here is that it is very hard to predict and time the market and the economy with any certainty.

A second factor to consider is interest rates. Right now, the Fed is creating new money out of thin air at an unprecedented pace, yet interest rates have remained low.

If you have money available, why would you take out a loan and pay interest when you are probably earning less interest with the money you have? In other words, it doesn’t make much sense to take out a loan at 5% interest when you have money sitting in the bank earning one-tenth of a percent in interest.

Source Wealth Daily

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