Wait a sec, don’t those repayments add up to $11,000 a month, and isn’t that more than the guy earns a month, even before taxes?
So I read this thread and then read my audit book.
According to my audit book, the IRS has been known to choose audit candidates by comparing who has titles to expensive cars and does not have a salary to support the expensive car.
Another reason to live within your means.
I couldn’t imagine living that way!! Sadly, I know a few people who do, but not to that extent.
But then again, I’m one who doesn’t want to be in debt at all and am slowly working at paying stuff off.
Living within your means is a very good thing in my opinion.
Assuming that the numbers are correct as I read the OP, the guy makes $90,000 and his wife makes $60,000, so that’s a total of $150,000 (although even that only totals to a monthly income of $12,500). Plus the $6,200 monthly mortgage payment includes a big chunk of tax-deductible interest, so he should get some back at year end.
But who knows? Perhaps the guy has an elderly parent from whom he expects to inherit a lot of money.
Or a trust fund. Often you don’t really know what the situation really is. But in this case, Dudley’s friend seems to be quite upfront about it. Seems like the kind of person who would say “besides, when Dad kicks I’ll get a few mill and pay it off” if that were the case.
The family described in the OP is living dangerously. Sure, things are working now, but it would only take one thing to go wrong for the whole thing to come crashing down.
Personal worth != available credit, IMHO. And even if that were true, every time you used some of the credit, making it unavailable, your personal worth would go down. Now, available credit may reflect personal worth, depending on how many other assets you have, but it doesn’t work the other way around.
Personal financial worth = assets - liabilities, and it seems that they have a lot more liabilities than assets. Unless that have a lump sum somewhere and can pay it all off immediately if need be?
Dunno. Maybe he was lying about the actual figures.
Well, from your description, he’s either an idiot, a liar or you don’t know the whole story. I’m guessing from your description and the odds - he is most likely an idiot and its least likely he’s actually the love child of Warren Buffet.
Not only is he an idiot, but when his house of cards comes crashing down around him, he doesn’t sound like the type of person to say, “Well, I knew the risks, and I’m at fault for this development.”
No, no. Instead, it will be demands to be rescued by friends, family, or the government.
This sounds like a bad analogy: Businesses tend to be corporations, which means the liability of individuals is quite limited. To put it simply, if a corporation goes bust the CEO isn’t going to lose his house or his car or most of his personal wealth. The creditors will have to be content sucking on the bones of the legal fiction created at the date of incorporation. With personal credit, however, there is no protective veil: The creditors can take everything (as limited by state law, I think).
I would say corporations are much more vulnerable to their creditors than people are. For starters, the actual amount of money involved tends to be smaller, making the ROI of any collection efforts lower. Individuals can be more slippery, e.g. If I were DudleyGarrett’s friend, I would be stowing away any money I can under the mattress or into safer places beyond the reach of creditors, simply moving to a foreign country is enough to dissuade most creditors from persisting if the amount involved isn’t huge.
Credit card companies don’t charge the kinds of interest rates they do because they’re evil, they charge them because unsecured consumer debt is almost impossible to recover economically once the borrower defaults. If you picked up tent poles and moved without telling them, what are they going to do? Even if the credit card was affiliated with a bank with whom you have deposits, I’m not even sure if it’s legal(or rather, easy enough to legally) for them to seize those deposits, although I would have withdrawn them as a matter of course.
The kind of easy, unsecured credit available to North Americans is absolutely LUDICROUS by the standards of most countries - I heard recently that GM was starting to offer car loans in China, a first for any car company - with a 40% cash down payment. Can you imagine if car dealers here had to operate with those kinds of risks?
I admit that my understanding of this may not be 100% complete, so if anyone wants to refute any of my points, please so.
Businesses also don’t use revolving credit without understanding the difference between the cost of that credit and the return they will get on other investments. There credit is usually not at credit card interest rates. Businesses need to have an good current ratio to even qualify for that credit - that is that they usually need to have twice the amount in current assets that is being proposed to be carried in current liabilities. i.e. if an individual were going to have a current ratio you would take all the cash and short term assets you have on hand (balance in savings and checking accounts) and that would need to be twice what you are committed already to owe over the next year. (But you don’t get to take salary you haven’t earned yet - just the money you have now - you don’t need to figure in your February electric bill either, but that cell phone contract, thats a commitment). Obviously, an individual wouldn’t operate like this, but most of us COULDN’T - we simply don’t have cash on hand to pay our mortgage and rent for the next year today.
Good grief, our income is about what your friends is and there is no way we could live that way. We’re doing good to be buying a place around 1/3 that cost, one car that is nearly paid for and low credit card debt.
Businesses typically use debt to make investments that will make a return. Going into debt for real estate is something I think is quite reasonable, because in the long term, people will usually benefit from the short-term tax breaks and the long term growth in value.
Financing expensive new cars just because the debt is cheap is ludicrous. Cars are tools to get around and offer some entertainment, but they’re terrible investments. Getting new plasma TVs and buying the latest fashions every week isn’t leveraging your assets, it is throwing money down a hole – and even at low interest rates, you’re paying extra for the privilege of wasting your money.
I never suggested that it was. In any case, now you are expanding the argument to consumer preferences - isn’t the purchase of anything non-essential to survival “throwing money down a hole”?
In the long run, buying real estate is generally “throwing money down a hole”, since in the long run, real estate only appreciates at the rate of inflation, and historical returns on equity markets far, far outstrip returns on real estate, but I’m not going to castigate anyone buying a house for being a spend rift. Most people don’t live for the sole purpose of dying with the most money.
I guess the most interesting question for your acquaintance is “what do you think is going to happen during your retirement?”
If this house of cards has not collapsed before then (and it probably will) the merry go round stops when the income stops. Unless there is a sucker who wants to bail this guy out, the only option will be bankruptcy. This will leave this guy on welfare during his retirement. Do you think his marriage will survive the stress of being poor?
I agree more than strongly with Ravenman. Unless you are a financial genius near the level of Warren Buffet, you are just deluding yourself and spending money you don’t have. If I loan a friend $100 a week for a year, it isn’t that important if I charge no interest or 5% interest. The friend is still going to be on the hook for at least $5200 at the end of the year even if he claims to be laughing at me because of the low interest rate. I will get my money back and so will the credit card companies and, regardless of what you think, they know what they are doing when they extend more and more credit.
I find it hard to believe that they could threaten you with say, a 21% interest rate and you could tell them to go screw and just write a check to them and be done with it instantly. It may or may not be possible for you but people that have that much money sitting around generally don’t waste their time playing games of chicken with credit card companies. To make your plan work at all, you would need a rather complex plan financial plan on moving money back and forth and that is still a very poor vehicle of doing it if you actually have the money to begin with except for an extremely limited set of circumstances.
There aren’t any true 0% credit cards either. There a are some that offer 0% on transfers or some other very limited type of activity. However, those will go to normal rates at some points as you already know because you are juggling credit cards to stay afloat. At some point, your credit score will become too low because of this activity to get any good rate on a new card let alone a 0% offer. That is when the house of cards falls. People think they are smarter than credit card companies just like many people think they are smarter than casinos and the results for each if you keep playing for a while.
If you have plenty of money to cover all these debts tomorrow without breaking a sweat and this is just your preferred form of managing money then that is your choice albeit not a great one. In any other case, this type of behavior delusional at best but more likely very ignorant and self-destructive.
I agree completely. Go ahead, loan me $100 a week. You can’t possibly lose. Give me an email address and I will send you my paypal. Once the money is in my account, maybe we’ll talk about interest.
You opened the door, counselor. You said corporations leverage their debt to their eyeballs, so people should, too. Unless we’re talking about Enron or Tyco or various other bad apples, AFAIK, corporations generally don’t use debt to pour large amounts of money on items that don’t improve the bottom line. If you’d like to explain how spend thrift consumer spending is a good financial strategy, go for it.
Most people are well advised to prepare for the day when they don’t want to or are unable to work. And as far as real estate, I agree that the markets would probably be a better investment if you could make some sort of shelter out of mutual funds to provide you with warmth, comfort, and protection from the elements. So far as I understand, the rule of thumb is that, all things considered, buying a house is a great move, because it is a better investment than renting, more pleasant than being a hobo, and more polite than crashing with friends for one’s entire life.
Now you aren’t talking about borrowing, you are talking about fraud - that can get you in even deeper. Both civil and criminal charges, liens against your property, even potentially jail time depending on how much fraud you engage in.
If you are willing to live the life of a con man, you might make it work, but I’m guessing that eventually they’d catch up to you, or you’d have to find a way to survive in a place in the world where the authorities wouldn’t bother with you.