Credit cards are legalized robbery unless you pay them in full every month. A mortgage on your house is often a good idea, but don’t spend over your head. If you borrow to buy a car, never, never go to a “buy here, pay here” place. They are the very definition of predatory lending. Go to a bank or credit union.
“Don’t invest in anything that eats or rusts.” --Bill Veeck
I have been unwise in the past about credit but I’m two months out from having my credit card dept completely paid off and have sworn to ony pay cash for things. Even my next car will probable be a cheap beater or a hand me down.
Now I’m trying to decide what to do with the excess money I’ll have per month. I’m torn between just paying off my student loans (which still have six years to go) and being really, really debt-free and saving possibly for a downpayment on a house. Complicating my decision is that I’m contemplating quiting my job and moving to a foreign country for a few years in the next year or so. Maybe I’ll split the money in half, part in savings, part extra money to my student loans.
KCRW’s To The Point topic today was “Drowning in Debt,” dealing with American attitudes toward debt and saving, generational differences and the scary way we’re fooling ourselves.
I found it very interesting–you can stream it or download it from that link.
As for me personally, I fear debt but do rationalise it; my husband and I have had very different attitudes toward spending and it’s about the only thing we argue about. We’re pretty close to a unified position now: debt is bad. We spend, we pay it off every month, we save, we contribute to funds for retirement, we hope nothing bad happens because it wouldn’t be enough to keep us going for long.
One of the interesting points of the program was the point raised that there are more people going through bankruptcy proceedings now than divorce, but there is a persistent perception in our culture that everyone is experiencing fat times and spending accordingly. We might be surprised if we saw the bottom lines instead of the shiny cars etc. Some people play it like a shell game.
And I think (at least I hope) many people aren’t spending as much as we think they are…maybe they’ve got holey underwear. 
And maybe some people know exactly how much disposable income they have and use it, who knows.
Absolutely! 
I pay off my credit card in full each month.
I saved for a house deposit, then took out a mortgage. The house is now worth at least 2.5 times what I paid for it, and my annual salary is now higher than the mortgage.
All my jobs have had index-linked pensions (why, yes - I am a geeky nerd!) and I have savings in unit trusts for emergencies.
I know it’s boring, but saving is better than borrowing.
Yeah, the tax savings sort of work like this - you give the bank 1 in interest - the government gives you .35 back (at best).
But there are other reasons to carry debt, and if you are going to carry debt, the interest deduction is nice. Some people like to carry debt because they’d rather have some liquid assets and pay some interest than have no debt but exhaust their savings. I do this. Its financially stupid, but it makes me feel better to have money in the bank, even if I know that I owe some of it on my HELOC. Other people like to use the banks money and the tax break to invest - if I’d refinanced my house at 4% rather than 6%, I’d be all over not paying off my mortgage and sticking the money in munis right now. Then there is the “well, I do have money to pay for this, but I’d need to sell some stock I’d rather hang onto for another three months to get the capital gains rate (or stock that is currently down, but typically cycles).” I do this one, too (currently sitting on debt until the capital gains rate kicks in on last years stock). Other people do it because the truly debt shy do have issues with their credit reports - so they will carry a little “cheap debt” for a while to make sure their credit report shows that they know how to pay money back.
Well, my understanding is that yes, there is some interest you pay, but it’s much lower than a conventional car loan would be. I honestly don’t know the exact figures and we haven’t actually done it yet. I picked up on this from a co-worker and it made sense to me. We’re due for another car in the next couple years (squeezing the last drop of life out of them) so we’ll investigate in more detail when the time comes.
Very simply, “Stupid debt = bad; smart debt may be good, but you really have to keep an eye on it.”
In the What are you saving up for? thread, I said:
This was a direct result of stupid debt, plus compunding interest fees.
I had credit, and I used it. Too much. Required payments increased, eating up more and more of each paycheque.
I borrowed to go on a trip and that put me over the edge. I got to a point where I was borrowing to eat. Not good. I couldn’t sleep; I was under great stress.
Eventually, in desperation, I went to a debt counselor, and then a trustee. The trustee put together a “Consumer Proposal”, an Ontarian thing where I paid down 3/4 of the debt and was forgiven the rest. One step short of bankruptcy.
I have spent the last four had a half years paving it off, while looking at all the trips, toys, etc, I had to forgo. Everything I had became threadbare or held together with duct tape. Yet in that time I managed to move into an apartment from a room, and make other changes to improve the foundations of my life.
Now the debt is paid off, and I don’t want to go back there. I may be behind in the consumer-toys world (no car, no flat-panel TV), but I am saving.
Someone somwhere said “You should only borrow to invest in things that will give a return (smart debt), not just to consume (stupid debt).” I did stupid debt. And I paid, paid, paid for it, in money, stress, time, and lost oppurtunity.
In this essay, A Penny Saved is a Penny Earned, the author states:
Yep. What do you really want to do? Money and such are tools. Richness is one way to freedom, but not the only way. But we North Americans have been trained to think that only Stuff will get us to our goals, when it can be a hindrance. The real frontier is improving Relationship, the connections we have with those around us: our friends, family, and neighbours. Stuff insulates us from them.
I like this. It pretty much reflects how I want to spend my retirement years. We have lived modestly for the most part, and while we have borrowed for certain things, we always do the “12 months no interest” thing and never borrow for these items unless we’ve already paid off a previous one. For instance, we bought carpeting, paid it off in 10 months, and then purchased a new furnace. We didn’t add a payment; we replaced one with the other. No interest paid, yet we improved our credit rating (which is, to the best of my knowledge, as high a rating as you can get). We never bounce checks and we pay everything on time.
Our stereo is 20 years old and perfectly serviceable, our TV is 5 years old but is an $800 “regular ol’ TV.” We don’t feel the need for extravagant stuff. My husband spends his frivolous money on his hot rod and I purchase modest items for the house.
We purchased a $100 coffee pot, but it was purchased with gift certificates, so we don’t feel guilty about it.
I want to be able to spend my retirement years enjoying it…not paying off huge debt. I think we’re on the right track.
After spending several years climbing out from under my own debt with the help of my financially-minded wife, and watching my mother completely fail to do so, I like financial advisor Eric Tyson’s guidelines: only use debt to finance those things that history shows have a higher likelihood of increasing your net worth over time: real estate, your own education, or your own business investment. Then the amount of money you have available to you will likely be able to pay off the debt.
Most(*) debt is for delusional immature suckers.
You’re a sucker because you’re paying MORE for the product than you’re being charged. Or, another way. . .you’re paying for the product and you’re paying the credit card company for the right to purchase the product NOW even though you don’t have money. Really, the argument can stop there.
You’re immature because you can’t wait until you actually have the cash to purchase the product.
You’re delusional because some people think they HAVE to go into debt. “I need to buy food”. If you’re at the point that you have to use your credit card to buy necessities, yeah, you might be right, but you’ve already fucked up. That didn’t happen out of a vaccuum. You’re living a lifestyle you can’t afford.
There are people making $500,000 a year who are in debt over their heads. There are people making $15,000 per year who are able to live within their means.
If you can’t keep your consumerism in check, that’s your fault. When I was unemployed, I literally spent like $80 in 6 months on stuff I didn’t need. No CDs. No fancy food or liquor. No books. No cable. No travel.
(*) Mortgage debt is different. Not only do you write the interest off, but you’re buying something that appreciates. Still, mortgage debt isn’t a slam dunk. I know people crippled by a 30 year mortgage that they took on at age 35. One questions whether that’s the best way for them to plan for retirement.
Borrowing to start a business is different, even though some people are stupid about that.
Student loans are not slam dunks. You can say you’re investing in your future, but borrowing $80,000 to go to Sarah Lawrence to get a degree in Sociology is pretty damn dumb borrowing. Borrowing $20,000 to go to U Maryland and get your Computer Science degree. . .not so dumb.
Cars are getting into the fuzzy area.
Ah, so you’re talking about using money from a home equity loan to avoid taking out another loan (e.g. car) where the interest would not be deductible. That makes sense. I had originally thought you were saying that the tax benefits of the interest deduction were greater than not taking the loan at all, which I didn’t see.
I look at that as an extra cost for convenience. You spend time or you spend money.
That was me.
That works only in a rising market, or in a bubble, when the value actually appreciates. This guy seems to think that the San Francisco Bay Area is suffering deflating housing values, and that therefore renting is a better strategy.
If the borrowing yields a greater return, then it’s not stupid…
I agree that a home equity loan can be a good one, especially if used to finance capital improvements to a house that increases its value. The situation I was referring to is people who use a home equity loan to pay off credit card debt (a good idea) and then accumulate more (a bad idea.)
I think the best way to say this is:
Debt reduces freedom.
It reduces the number of options you have.
Now, you may look at alternatives with your eyes open, and choose to take on some debt. You trade some freedom for some other good, knowing that eventually you will pay off the debt and come out the other side with more options. That is smart debt.
But when you have the kind of debt where you borrow and borrow just to keep the financial balls in the air, it reduces your freedom with each borrowing.
That’s true. And if it stopped with one purchase you couldn’t afford, it could be more understandable. But, that’s now how people do it. They roll on and on with it as you described in the other post.
In some markets renting is a better option than buying. Of all the things to do into debt over, a mortgage is least dumb.
Of course not, l I was trying to say that, but a lot of people do borrow for business, and can’t get that money paid back. I’d borrow against every cent of equity in my house if I could get a sufficient yield from it.
The thing about the OP is not just the debt questions, but his aspect of doing it to keep up with the Joneses. That’s real dangerous thinking.
Right! We have friends who took out a home equity loan to pay off expensive debt, and then went and spent it on other stuff, and still have a 20 year old finance company loan at 21%. We just shake our heads…
I’m not really sure why people think that buying their home at X amount of dollars and now having it worth 2.5 times X is such a great thing. Unless you plan to sell your home you will never see the extra money. You can’t buy a house at X and sell it for 2.5 times X and then go find an equivalent house at X. They’ve all went up in value together. So unless you want to buy a smaller house, move to a crappy area for real estate, rent, or go homeless I don’t know what the real benefit is. And even though it gains you equity (i.e. more collateral so the bank can lend you more) your still going to have to pay back interest on that money they lend you.
Actually, I see your house going up in value too fast as a hinderance. Your property taxes and home insurance are going to go up also.
Going back to the OP, as others have stated, debt is a suckers game. If people could see how much they give to these blood suckers in interest they might think again. Sure, sometimes you have no choice to borrow for things like a mortgage. But it still leaves a bad feeling in your stomach when you see that buying a house for $150K at 6% over 30 years will cost you $324K.
Hampshire, actually, you can sell and downsize. The house one needs when raising their 2.3 children, and the house one needs when they’ve finished grad school and are on their own are two different houses. Many people used to plan on that extra equity as part of their retirement fund (many still do, but it isn’t a good idea). Plus, reverse mortgages can help people who inadequately planned for retirement.
You are very right about property taxes. They have bit many people in the ass. Many municipalities have started limiting property tax increases year-over-year on private residences for just that reason. Smart homebuyers will take that into consideration when purchasing a new home.
Yeah, I thought about that also. But let’s say currently you buy a house for $220K and plan on retiring in a smaller home that goes for $120K. What’s the difference then if the market stays stagnant and neither home appreciates or if the market goes up and your house is now worth $300K and the smaller house now sells for $200K. Aren’t real estate prices relative?
Rising markets are good for downsizing your house.
Falling markets are good for upsizing.
If you don’t plan to move, there’s really no great benefit from it, and yes, the increase in property taxes is a bad outcome. It’s nice to feel like we’re sitting on a pile of money, but it’s not like everyone is going to cash out and move to Fiji to lay on a hammock.
Although, when my house went up in value, I was able to RE-FI and avoid PMI.
And, yes, I did take some of the equity to pay for my kitchen which I’m still paying off.