Wednesday, April 8, 2015

Sluggy's Views on Debt

* It's the one where Sluggy babbles(or should that be burbles?)on and on about debt and money, for what it's worth.




I am one of those people who believes in good debt and bad debt.

Of course, I also believe that the good debt comes with disclaimers.

Good Debt---



* Student Loans....but ONLY an amount commensurate with the income the degree earned will allow you to make.  Going out and putting yourself into massive amounts of debt for a degree that won't jack up your lifetime earnings and won't allow you to pay off your student loans within 10 years(and probably NOT in your working lifetime) is NEVER a good idea.
Ask me how economically advantageous my theater/art degree was.....lolz  But at least I incurred no debt getting that piece of worthless paper.



* Home Mortgages....but ONLY an amount that will also allow you to also EAT WELL, have heat/electricity and other necessities while paying this off.  Don't spend more on a house than you can afford and NEVER listen to how much a realtor says you can afford.  After all, they don't have "skin in this game" and they stand to GAIN more the more you go into debt on that purchase.

While mortgage debt can be considered "good" debt, don't confuse this debt with an INVESTMENT.
Your home is NOT an asset or investment, it is a cash flow drain on your wealth.  The only time a mortgage/home IS an investment is if you rent it out or plan to fix it up and flip it for more than you put into it.
You need a place to live and that home will be a drain on your finances, from taxes, to interest on your mortgage, to insuring it, to maintaining it.
A place to live is a necessity and unless you have enough to pay cash for one, you will have to have a mortgage on your house.  But get rid of that debt as soon as you can.

Bad Debt--



*Revolving Personal Debt(aka Credit Cards).....items bought with a credit card that you can't immediately pay off(meaning you don't have the money for it but want it NOW!)--Just think of anything you BUY on a credit card as NOT PAID FOR YET....because, it isn't paid for yet.  You hold possession of these items but you don't OWN them until you pay that bill off.
Period.

You may want that new dress/airplane ticket/dinner out/etc. NOW but figure out how long it will take you to reimburse that cc company(months? years?)and add all that interest up and does the item look like the great deal you thought it was when you took it home?  A $50 dress can end up costing you 4 or more times that if you have a habit of buying "wants" on credit but only paying off the minimum balance each month.
Even if you are a bargain shopper and can't pass up a clearance sign(*raising my hand here*), if you can't pay cash for it and put it on credit that bargain will end up being no bargain once it's finally paid off.

Of course, if it's a "need" like healthcare or keeping the heat on in Winter and you don't have the cash to cover it, you'll have to break this rule.  But if you've lived frugally and financially responsible for many years you'll possibly never end up in a situation like this.
Knock on wood.



* Financed Cars.....you should avoid financing cars. 
I now believe in our 2015 society that there are 3 main reasons that keep many consumers from getting ahead in life.......too much mortgage on a home, having to have electronic gadgets and financing cars.

Yes, cars have become for many a necessity in our society.  But even if you have to buy a car you can control what you buy and how much you spend.

Buy the car you can afford.  If that means a beater(a cosmetically challenged, older car with mechanical issues), that's what you buy.
If you can ill afford to throw money away, NEVER buy a new from the dealership car.

Now I haven't always followed that bit of advise myself.  In the last 32+ years of married life, Hubs and I have bought 12 cars over the years.  8 were used from dealers/family/friends, 4 were new from the dealer.  Though we haven't only bought used we never bought more new than we could comfortably pay off quickly or pay cash for. 

Of the 4 cars bought new only 1 purchase was stressful since it was unplanned and brought on by an emergency situation.  And we were young and had yet to build an adequate financial cushion for ourselves.....that is what made it stressful.

We had a Chevy Chevette and Hubs was going to commute(1.5 hours each way)in it to his job in NJ when we moved to PA in 1986.  The week before the closing on our first house the Chevette began to have mechanical issues.  So we HAD to buy a car.  Hubs parents had just bought a new car(paid with cash mind you)from a dealer in NJ so we used that salesman and because he made such a grand commission off of Hub's parents(it was a large gas guzzling luxury boat!)the dealer took pity on us and we got this Omni for dealer cost.  Seeing as all our cash had gone to the down payment on the house we had to finance that Omni. The purchase price was $6K.
$6K today would be a walk in the park but in 1986, when someone at our ages and levels only made $12Kish a year AND had just plunked down most of our cash on a house, this was a financial crisis.

About 6 months after moving into our small home, and I had paid all the bills for that month, I realized we had $50 or so left to our names and still had to eat that month.  I vowed at that moment to NEVER get into this situation again.  I went out and got a job and in the 3 years I held that seasonal job I paid off that Omni and paid off both of Hub's student loans in full.  The first winter in that house we couldn't afford the electric heat(we had in on in the crawl space however for the pipes)so we moved a space heater from room to room with us.   The next year I got sick from the kerosene fumes so we saved up and paid for a woodstove to be installed and we heated the entire house with that.

We have bought used cars from family, from friends needing to unload a vehicle and from companies that specialize in used vehicles.  It helps that neither Hubs or I have "car fever" or have any attachment to a hunk of metal(if you don't count my middle age crisis Sonic car).  ;-)

This car event back in 1986 was what solidified how we viewed debt and used debt from then on out.
I vowed to NEVER go back to feeling that helpless when it came to finances.

But I digress......

While some debt can be called "good debt" don't kid yourself that debt is good.  Debt limits your choices in life in so many ways.

Have you ever had a light bulb moment about your finances and debt?
Do tell us.....

Sluggy


 

14 comments:

  1. I was brought up poor and lived a small life when I was on my own. I think a lot of my problem was Den. He lived the entitled life and his parents never told him no. It was a miserable first few years of trying to show him how much damage he was doing. He would just come home with a new truck or something expensive and I would have to figure out how to pay for it. Once I said no to a new truck and his parents sent me out on a wild goose chase for pumpkins for the kids. While I was gone, they went and bought a truck. It finally got to the point where I just said to him, I can pay for the house or stuff. Please don't ever repeat this to him but a lot of our problems were because of how he handled money. Its better now but it was a miserable road.

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  2. My father grew up poor,often hungry, in a tenament on that side of the railroad tracks, Single working parent home with 5 kids, child support didn't exist, but culturally, we have a strong work ethic and Dad, with onky a 10th grade education drilled into our heads about credit. Don't buy it if you don't need it, onky use credit if you have the means to pay it off in full unless it;s an emergency such as a car repair. Determine wants vs needs, save for wants. When I was married, I had now DX agree not to buy anything over $50 without first discussing it with me. That worked for most of the time. Like Sonya Ann, there were issues, stemming from our signufucantly different, $ wise, backgrounds. "But I wanted it!" simply didn't fly with me. I divorced him for several reasons, including financial decisions he made without my imput. I am much better off now, as a result. While on paper there is a lot that I can afford, I continue to choose to live modesrly, well below my income. I drive a paid in full, used car with low mileage that is economical to run and insure.This works for me.

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  3. We will never buy a brand new car again. That is all...

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  4. Sluggy I could write you a book on the mistakes i have made. I think I have made every financial mistake there is TWICE!

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  5. I have had many light bub moments, but one looked like a can of green beans. Green bens were on sale, 5/$1. This was after my divorce and money was very tight. I decided that if I could afford to get a 15 cans of green beans, I could eat cheap green beans for almost 4 months. That started a different chapter in buying food. I forgot what I put back or did not buy to afford the green beans. Every week, I looked for just one thing I could buy cheaply that was on sale. Eventually, most things I ate were on sale when bought.

    In 1983 I taught a young woman how to use coupons and shop sales. She is now a nurse who taught her daughter and dil the things I taught her. My light bulb moment when I met the young woman, also names Linda, was that you just never know how your money words of wisdom can spread. One of the young women she taught (d or dil) raids the drug stores like sluggy.

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  6. I recently had a lightbulb moment about credit cards. We use them, paid in full each month. But of course by using them, you are spending next month's income unless you pay them as soon as you charge. So, to get the whole, realistic picture of what we spend, I decided to start paying it as we used it. That was a wake up call! We already live on 50% of my husband's gross salary after insurances, retirement, etc. The tough part has been paying off the bill in full from last month PLUS paying any new charges as they come. Hopefully we won't have that happen very often anymore. There may occasionally be times I cannot pay it as we charge on it; for instance on vacation I am not going to be going online and paying, but will whenever I get home. I've also started using cash for groceries, since that is where we seem to spend the most. I know the "experts" say it hurts more to use cash than a debit card, but so far I am not feeling it. But I am more aware of what I have left, so that is all that matters.

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  7. I think a home mortgage can be good debt in some circumstances. My brother bought a house is a very desired area - it was written about in magazines as one of the best places to live in Canada. Thus the value of his home has quadrupled at least and he'll have a nice bundle of cash when he sells.

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  8. I have zero debt and that's the way I like it... if we want something, we earn money and save for it. I don't like "owing" anyone, anything... so if we can't afford it, we don't buy it. I don't like clutter and 'stuff' either though, so i'm careful with what comes into the house.

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  9. I don't have any debt other than the house. Debt sounds bad to me in any other form.

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  10. Overall I agree with you. I hope and plan that we are in our last car loan. I think that done correctly, a house can be an investment but must be treated as such. If you buy a house, fix it up or just buy at the right time, the appreciation really does add up and it is tax free if it is your primary residence for two years. Plus you can cash out and sell at the end so I hope think it is an investment that comes with maintenance fees.

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  11. One of the best things we did was to get a credit card that gave us points for using it. I always paid it off every month anyway, so why not get points for it. Those points translate into cash. It's better than a savings account! We get 1% for everything, and some things that are featured for three months, we get 3%. Our savings and checking accounts are only giving us a few cents a month. Pitiful! I think we've had the card for 5 years, and there is about $1100 that was "given" to us. It's very steadily growing. So, we use that credit card for nearly all of our purchases. We also have mutual funds and savings accounts. My wife is still looking for full-time work, so we haven't purchased a house yet. Soon, I hope. The cars are old and running well. No big wants for us, either. We are comfortable, yet we want to be better off so we can plan better for retirement. Thank you for making us think and make conscious decisions about spending.

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  12. Zero credit card debt here, although I do have student loan debt. My parents used credit cards a lot and had nothing saved up for retirement. As a result, my Mom has no car to drive and no money for food. All of her money goes to pay for credit cards. Very sad. I learned from their example.

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  13. I worked full time and went to college half time and paid cash for my private school BA, I went to a cheaper state school for law school and paid it off in 7.5 years, I have always bought less home then I could afford, and made extra principle payments on the home mortgage. I haven't paid an interest charge on a credit card in decades.

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  14. You are so right. Many people buy far to much $$ house and then wonder why they are broke all the time so have to finance everything else. We bought a far smaller less expensive house when we downsized so that we could afford to pay ourselves reasonable salaries at our company without killing ourselves. We paid cash, all the bills and taxes on it are much lower and we tucked a good amount of money that was left over after the sale of our much larger paid off house into the bank for retirement. Credit cards are something that is meant to be paid off every month - something most people forget. I use mine to rack up travel points. The only thing I pay on it every year is the annual fee which based on the free flights we get is well worth it.

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