I have some great memories of playing Monopoly with family and friends over the years. Collecting money from my sister when she landed on something I owned gave me more satisfaction than it ever should have. Similarly, it pained me when I landed on something other people owned and had to pay up. Little did I know, Monopoly teaches valuable real life applications when it comes to money management and how debt isn’t necessarily the bad kind of four letter word.
When you play Monopoly, you can try to buy everything you land on and find yourself cash poor. Conversely you may go around the board being way too selective with the properties you acquire and find yourself never getting ahead. Real life offers similar risks and rewards. You may feel good because you paid off your mortgage with a 5% rate fifteen years into your thirty year loan, but had you invested that money, you could potentially have a substantially larger nest egg in retirement and still have your home paid off. Debt can be a useful tool to acquire assets that we want and need such as homes, businesses, cars, furniture, etc. Knowing the difference between good debt and bad debt can put you far ahead if you learn important lessons early.
Understand the rates you pay vs. what your money could potentially earn. If you can afford a payment on a 0-2% auto loan, you are probably better off financing the purchase and investing the cash that you would have paid to purchase the car. If you have a credit card balance of $20,000 at a 19% rate, you should aggressively pay it down because no matter how great your investment portfolio is, it will be difficult to earn more than that steep interest rate on average.
The type of debt you have should also govern your payoff strategy. Auto loans, credit cards, and other consumer debts generally don’t have tax advantages associated with the interest and many times you are paying off an asset that has already significantly depreciated. Real estate or business debt can be examples of good debt that hopefully appreciates over time as the amount owed goes to zero. Like most things in life, your relationship with debt involves finding a healthy balance. Don’t be the person in Monopoly who desperately needs to avoid landing on properties owned by others while passing Go to collect $200 that is already spent. You also don’t want to be the person who has cash that isn’t earning what it should because you haven’t bought any properties! Find the right mix and it’s like winning the game. The wrong mix might make you want to flip the board over and quit (I refuse to name names but you know who you are!).