Debt
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?
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?
Comments
A basic understanding of economics, finance, and household budgeting help greatly with living debt free.
It's easy. Pay cash.
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.
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.
Sorry, but that does not follow. Debt is essentially selling a future version of yourself (your future money and the time to earn it) off. That is the only real burden. If you have no debt, you can throw some clothes in a bag and go anywhere or do anything you like so long as it's free. If you have some money and no debt, you no longer need to worry about your job. You can quit the day it is no longer fun!
Consumerism, however, is arguable a trap in much the same way as debt. Once you've decided the only lifestyle you're interested in is one with 50' TVs and dinner out 5 days a week, then you're trapped unless you have a change of heart.
Regarding your lawyer friend, it sounds like his transition was an investment and not just plain debt. There is a difference, he was building up a practice, which was presumably gaining value even if he didn't have much cash on hand. I didn't talk about that earlier because, let's face it, the vast majority of Americans are not in debt for this reason. Same with your new car example. If it's an investment (required to run a professional business), then as long as the ROI is good that's fine. Even with that caveat, a majority of Americans spend more on their cars than they should or can even really afford.
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.
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.
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?
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.
It helps to have cash in the first place. 8)
Since when is that the truth? My anecdotal experience is that you should find that person "throwing" away a car with 100k miles on it (8 years old on average) and drive it into the ground. Most well made automobiles will easily last another 70k to 150k miles and you'll spend well less than $1000 a year (I find $500-$600 a year to be a good estimate) in maintenance costs. In other words, the new car cost about $20,000 for 8 years of use, and you can get another 8 years out of it for closer to $4,000 + purchase price (hopefully about $6,000). If you play your cards right, the used car costs half as much over the same time frame, it requires less upfront money (thus easier to buy/maintain with only cash) and probably doesn't cost you an extra 6% annual for a loan.
But, if you think I'm wrong, go ahead and buy your new car and when it's utterly useless to you at 100k miles, please send me an email to come take it off your hands at no cost to myself. In fact, I'll even throw in $30 to cover the price of whatever fuel you leave in the tank.
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?
If one doesn't have enough money to retire, there's the motivation. I don't have to sacrifice on purchases to be debt free nowadays since I prefer cheaper used stuff and hate to shop in general. "The best things in life are free" is so true. Add in cheap things, and you've got several lifetimes' worth of great choices.
It takes 10 minutes to change a cat converter.
I really have come to the conclusion that cars today aren't what the used to be.
There are safe haven investments that pay a return.
You've worked hard and the money is in the bank, but you are still you. I for one continue to talk about where I can buy tomatoe product for sixty five cents a can. You can buy second hand. You can drive a clunker. I do and have done all of those things.
It seems like every body I know who has money is protecting the money more than living. There are those people in the middle who are working towards a goal of retirement with a pension plan, but that, today, seems very risky.
My observation would be that those people who risk debt to get a return seem to be a lot freer with the life style. On this blog The Tim is a play on The Donald. Donald Trump encourages leveraging. That seems risky but is there something to that?
Debt is a trap or a means to an end. Living debt free seems to be a trap also of living within our means. Are our means stifled by the fear of debt? The fear of risking debt?
Leveraging makes sense most of the time in an inflationary environment. Even if you bought at the peak of the last housing boom in the late-80s that ended with the 1990-1991 recession, after a few years rents caught up with the inflated housing values and over time even money-losing rental property turns into profitable rental property. Its just a matter of staying solvent in the mean time. And, of course, with leverage you get a multiplier of any increase in the price of the house. It makes total sense most of the time since there's an inflationary bias to the whole financial system since that leads to investment and increases in profitability and everyone who participates in the system does well in that kind of environment. Basically, you are betting on the side of the casino, and all the heavy players (Fed, Treasury, etc) all want that side to win.
I am debt free. As I work for the federal government, I have been contributing to a "mandatory" pension plan. I have a very boring investment portfolio, almost guaranteed zero loss with minimal return. I will not ever own a million dollar waterfront house, nor drive a Porsche and I am okay with that. What I do have is that I can sleep at nite, knowing that me and mine will be okay upon retirement, irregardless of what the market does.
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I hate the risk associated with leveraging and I am willing to accept the lost opportunity of greater returns, but that's just me.
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It's all relative to the times. During the '80's thru early '90's I've been told that tech people with high demand skills were leaving DoD to go work for Boeing or one of the military defense contractors, sometimes getting as much as a 60% pay increase. You were actually considered a bit defective if you did not move on to the private sector. That isn't happening today.
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My concern would be that after a life of service your retirement will look like every other day, maybe. The people I know with pensions are pretty desperate at times. The ones with investment income seem to be doing better.
My best investment story is of a guy who found an engine and spoiler of a Plymouth Road Runner in a barn and bought them for $600. He built the car around those two items and netted $54K after about two years when he sold the finished car to a guy in California.
That was a for cash project, but there are people who just trade cars they find, buy and sell. You can do that for cash.
Using other people's money seems to be a theme even in the get out of debt books that I have read. Borrow from family, or consolidate loans is a chapter or two in every book. When you talk about creating wealth it's the whole book of how you have to risk either your own money or some one else's.
Other people's money is how we got to where we are today. Is there building wealth with out risk? Can you build wealth without debt?
The answers are no (on a technicality) and yes. Every action you take (or don't take) has some inherent risk, but you can build wealth without debt; most very wealthy people carry little debt (as in 10% of their net worth). If leverage were such a brilliant idea, why doesn't Buffett leverage his worth 10-1 and get really rich? Even the wealthy you don't realize are well off do it by not going into debt.
I don't know this guys situation. Maybe he really could not afford this trip. It's, I believe, unkind to shame someone who cannot afford the same luxury as yourself. If he could actually afford the trip, then he is showing poor judgement about prioritizing his money, perhaps, but that doesn't necessarily make his decision wrong or even pathetic.
You are confusing sacrifice with delayed gratification. Debt always costs future money, but allows you to buy something sooner. Let's say we each have $475 a month available for a car payment, and we each currently drive a clunker. With that, you can buy a $20,000 car today with no money down and still have enough for a candy bar at the end of the month. Meanwhile, I drive my clunker for the next 42 months (3 1/2 years) - in that time I've saved enough to buy a new car with cash. At this point, because I delayed my gratification, I can buy a new car every 4 years with the cash I save and pocket $3,000 in savings each cycle compared to you buying on debt.
I sacrificed for 3 years early on, but we're now on entirely different debt/asset cycles. I'm building wealth quicker than you and I still get a new car just as often as you do. It's even the same car!
The people you know probably aren't sacrificing because they are living debt free. They are sacrificing because they fritter their money away on some other worthless items.
Yes. I had a relative who became a millionaire without taking on any debt other than that for her primary residence. She built her wealth thru frugal living and conservative investing. It took awhile, but she did it and she only had a high school education.
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Yes, you can make a million dollars without incurring debt, you're just not saying how. Let me say this about being frugal and delayed gratification; it's a sacrifice.
Today debt is all around us, it's every where, every body owes money, I'll bet the person on the corner with a shopping cart has debt or is on the corner because of debt. Everybody got multiple credit cards, second mortgage, consolidation loans, OK, you get the idea.
What I'm not saying is that you are going to die. You have a limited time on this earth. Cancer can strike at any time. It happened to my second wife.
There must be a balance between living in fear of debt and living. Why is there such a wide canyon that some people can cross and others just look over the edge?
FWIW she did it by living well within her means, investing mostly in muni-bonds, blue chip stock that paid good dividends, and some real estate (yes, she paid cash for the real estate).
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Yes, she scrimped early on in her life, but in her later years she did whatever she wanted. She would take trips to Hawaii, buy a new car every so often (cash), visit family / friends thruout the country, etc.. Her lifestyle wouldn't be anything you would call extravegant, but she definitely had the resources to pursue whatever activity she wanted. She grew up in poverty, so her expectations were not lofty. I don't think she felt she was "sacrificing" anything.
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She was the type person who would only pay cash for big ticket items because she felt paying interest was wasteful. That's what I call frugal.
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Wait, so you're saying that taking one family vacation rather than sending just the child off for a week is a sacrifice? ??? ????????
You're just not listening. Save some money each month, avoid debt in all circumstances where it is not paying for itself (E.g. if buying equipment makes you more profitable and pays for itself then debt is ok), and consistently invest. If you read The Millionaire Next Door, you'll get all this advice about a hundred times over. It's not rocket science.
I don't, and I know several people with either no debt or only a reasonably sized mortgage payment as well. Besides, your argument stinks of apathy. Two thirds of the population is overweight or obese as well, and that super-majority still doesn't make it a good move.
Then you don't know what living really is. I can have a wonderful time for $1000 a day and I can have a wonderful day for $10. And, frankly, most of what you've talked about doesn't make your life any better or worst. Most people derive very little additional satisfaction from a $50,000 car than a $14,000 (both new). The same is true of clothing, electronics, and housing. You can buy $70,000 mattresses, but most people sleep as well on a $500 one. And don't even get started on food. Most people can hardly tell the difference between a $100 glass of wine and a $5, or a $12 steak and a $70 one. Most of the difference is the act of dressing nicely, acting all formal, and eating in low lighting. You can do that at home and safe the 30 minute wait to be seated.
In short, you can live just as fulfilling and fun of a life while still being responsible as you can as a spendthrift. I'm not advocating giving up every luxury, but just do them in moderation. That daily latte, for instance, feels like more of a luxury if you only get it twice a month. Most luxury is like that, excellent in moderation but in excess it becomes mundane.
It's a discussion, it's one I have constantly. Retiring is pretty simple if you settle for less. If you keep to the path of the straight an narrow you can achieve everything you want.
Now what if you want more? This blog is a good example. How ambitious should we all be in getting out the message of banking and home prices? We can all stay here and talk to each other while people look in, but do they get the message?
How much should be spent on getting out the message that things need to change in the purchase and sale of Real Estate?
The example of the guy with his child on a field trip is an extravagance for one child as opposed to the family. It would also be a sacrifice for the family to send the one child. We chose to make that sacrifice with concessions to our daughter. As luck would have it she had the same opportunity two years later.
Does it change things if the field trip was to Boston to learn the forming of our Constitution?
It's a discussion of more than if buying second hand is a savings. There are choices.