Debt

[davidlosh@davidlosh.com]

Mortgages of a half of a million dollars seem kind of standard today. OK, let's say a quarter of a million dollars. That's cheap isn't it? We can all pay a quarter of a million dollars over thirty years? Yes, no?

Then we have those credit cards that the banks want us to use for getting "cash back." If you use the card you get "cash back," or bonus miles, or some thing else i can't think of right now.

Then you have those car payments at 0 down and an apr of 2.9%. What's the deal with that? Why does the payment always add up to $300 and $500?

I know if I take my income and break it down to payments it adds up to me having my stuff, but paying for that over time.

What are your techniques for getting out of debt?

[dls]

The only realistic method for an honest person to get out of debt is to pay the debt off, and doing so as quick as possible to minimize interest paid. About the only debt that is reasonable to assume is housing debt since it is quite difficult for most folks, myself included, to save up the price of a typical house. It is reasonable for people to save up and pay cash for clothes, appliances, vacations, and even cars. I find vacations to much more enjoyable when I know I won't be working to pay it off afterwards. The $300- $500 mentioned in the OP as typical car payments could be stashed away now for a future cash car purchase. $400/month in say a CD or money market will cover the costs of a mid-priced car, say ~$20,000 plus tax and license, in ~4.5 - 5 years. Enjoyably living debt free is readily doable, a person just has to plan ahead, live below their means, and understand the difference between 'want' and 'need'.

A basic understanding of economics, finance, and household budgeting help greatly with living debt free.

[tomtom]

[rose-colored-coolaid]

It's not rocket science. Let's ignore housing for a moment.

The only other expenses that are reasonable to finance are education, medical, and possibly a car. If your degree will boost your long-term earning potential, then it's rational to take out as much in loans as the extra earnings (minus lost wages while in school) over perhaps a 5-7 year timeframe (about as often as people switch careers). For example, assume a diploma nets you $25,000 a year and there is no inflation. Over 10 years (4 for BS and 6 for work), a HS grad earns $250,000. Let's say the college grad has picked a profession where $50,000 salaries are common, they work 6 years for $300,000. We can see that over a reasonable time horizon, the college grad makes $50,000 more than the HS grad, so he should take out no more than $50,000 (including interest) in student loans.

Medical loans are as much a moral decision as a financial one, so I won't dare to offer suggestions here. Now, about cars. If you can't pay cash, you do not deserve a new car. In our society, you probably need a car to get to/from work and social obligations, so go ahead and buy one. But unless you are paying cash, you should get the absolute cheapest car that meets your needs. This is going to be something like a used Hyundai sedan, which probably goes for less than $4000 with less than 100,000 miles (required for most loans). Such a car should cost less than $150 a month over 3 years (not 5 or 7!!!)

Housing, of course you can rent if you don't want any debt. It's worked out well for people for literally thousands of years.

[davidlosh@davidlosh.com]

I have lived debt free and most of the people i know live debt free. It's not worth the discussion.

If you own a business and want people to do business with you there is a certain expectation from the consumer. The beat up pick up may be great for your ego, but the client has qualms.

Education is one thing, but setting up an office is another. My attorney worked in a law firm then started his own shop. It's been almost ten years and he is just now starting to see day light.

Our own government is creating debt. Kary says debt is wealth to the person lending the money.

Debt is all around us. We all pay for the debt servicing that goes on in the normal course of business.

So it may not be rocket science, or it may be easy, but the fact remains that renting an apartment or house, and working your job to save money to be debt free is just as much a hole, or trap, or burden, as servicing debt.

[rose-colored-coolaid]

[davidlosh@davidlosh.com]

Debt has changed.

If we do have deflation, if we do have a lagging economy, then we will be paying debt with real dollars. Future dollars in my life time have always been inflated. The more inflation the less the dollar was worth. It was easier to get more inflated dollars to pay off past debt.

Companies got hip to that and began charging more interest, more fees, and asking for more minimum payments.

Debt today is more of a problem than I can ever remember.

[BillE]

Debt is just buying money. You go to the bank and get $90, then you give them $100 over time.
The best way to get out of debt is to not get into debt. Most people could get around just fine in a vehicle that cost 1/3 of what they are currently driving. But that cheaper vehicle may not be as fast or as flashy as they think they deserve. Those same people think they need a new tv, new leather couch, vacations, etc. All they look at is the monthly payment, not the total of payments. They end up paying interest on everything which just makes the hole deeper and deeper.

[Markor]

Well put BillE. Get out of debt and never get back in. A friend of mine has a house, truck, car, motorcycle, boat, etc., but no debt, on a waiter's salary. The house was paid for by renters while he lived in a van (down by the river). The other toys were bought used and restored to great condition.

[davidlosh@davidlosh.com]

It is easy to live debt free, pay off debt, get out of debt.

It's a step in the process. There are no specifics here though. My specific concern is mortgage debt. If people pay down the principle balance in the front end of the loan the loan amortizes quicker. I'm not seeing that in today's discussions about Real Estate.

There's a lot of chatter about cash for clunkers and the debt that is creating. The truth is buying a new car is now the only way to keep a car in good repair. A car can nickle and dime you to the death of the car. A new car today is good for 100K miles before you throw it away. So in essence we are just leasing new cars.

How do you get around that?

The price of Real estate has gone up to a point where you have to have a mortgage because it's cheaper to have the forced savings, as they say, than saving on your own.

How will you get rich without debt? How will you get to travel the world in style and have all the things you ever wanted? Where are your dreams in being debt free or it that the extent of your dreams?

[softwarengineer]

HI DAVID

The secret to living debt free is simple: patience and intelligence. It probably explains why industrialized countries have a much lower fertility rate than 3rd world countries....they have the intelligence to save their money, get more living space, then have kids [if they aren't too old, albeit, even with no kids, they can retire perhaps now]; in that order.

The problem with American house prices is impatience, if everyone waited until they could pay 20-50% down and make 10-15% net pay mortgage payments....the prices would be a lot lower.

[FreedomLover]

[rose-colored-coolaid]

[davidlosh@davidlosh.com]

I use to agree until we bought a 1998 Jeep Cherokee in line 6 cylinder. At 100K it had problems, catalytic converter being just one.

There is a guy who sold me used cars for our business who told me we needed to start buying new. So far he has been right.

My difference is that we drive every day, and any day a vehicle is out is money we lose. So we have spare cars. It's different in that regard.

If you are just day shopping a 1978 Cadillac is the best value. You can get one with low miles for like $2K and drive it for years.

Now about the life style, let's talk about how you get to having a life and staying debt free. I have lived debt free most of my life. I have leveraged for ventures that are pretty high risk, but most times that was from a solid cash based position.

Here's an example: Our kids had an opportunity to go on a field trip to Boston in grade school. One of the parents, who I know, wouldn't let his kids go because the cost was outside of his budget. I understood, it's the way he lives, but at the same time it was $1400 total for two kids. Most parents, myself included just found the money over the six months it took to raise it. This guy stood by his budget.
I've said there are many of my friends who have tons of cash in reserves and owe nothing. I have been one of these people for most of my life. There should be a balance between having what you want and the sacrifice it takes to staying debt free. It always seems to be a sacrifice.

So where would the balance be? I'm a cheap guy who needs very little, but have expensive dreams and ambitions. If I really need money I can get it, save it, or find it. For me that is the biggest problem. If you are sleeping at night, and have all your money safely tucked away, where is the motivation to get more, or do more?

[Markor]