Entries Tagged 'Debt' ↓

So my dad wrote a comment on my earlier post saying that there is good and bad debt, and not having debt doesn’t mean you are good at managing your money.  That is definitely true, and I feel like I need to address what I think the nuances between good and bad debt are.

First of all, I am pretty sick of people telling me that a mortgage is good debt, because it is not that simple.  I think a mortgage can be good debt if the property you purchased  generates cash flow. In the case of a primary residence, this means that the cost of your monthly mortgage is less than the cost to rent a similar home. In the case of a rental or investment property, this means the rent you collect covers your mortgage and maintenance costs.  Additionally there is the possibility of asset appreciation, but that is an uncertain factor that should be measured conservatively.  A mortgage is definitely bad debt if you can’t afford it or if you have to  stretch your finances extremely thin to afford it.  If you are losing buckets of money by taking on a mortgage, then it is bad debt.

Another iffy type of debt is student loans.  A lot of people consider them to be good debt because they financed an education, but I think student loans can also be bad debt if the education was never put to use or if the interest rates are extraordinarily high.  Then again, it’s hard to gauge the future when you are young, idealistic, and have a passion for learning. However, it is possible to figure out the approximate salary you could potentially receive by finishing a certain degree.

Credit card debt is another thing that could be good or bad.  If your credit card debt has 0% interest, it is possible to leverage that money into safe investments and pay the credit card company back.  In fact a whole group of people have taken advantage of this in the past few years when bank interest rates were high.  However, most people who have credit card debt are in a situation where they are paying extremely high interest rates on purchases of useless items.  That is extremely bad debt.

So what’s the bottom line?  I think good debt is basically debt you could make a profit on and bad debt is the debt that make you have less than what you started with.  It is hard to figure out which is which in some situations, but when you realize you have bad debt you should work on eliminating it as soon as possible.

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Since the hubby and I do not have any debt, we do not know the stress of debt, but there is definitely stress in saving money. First, you have to be vigilant about deals and sales when you want something.  Then you make sure you use your coupons. You also do things like budgeting to make sure that you have money to save.  Then after you save your money you have to figure out how to allocate it and manage it so you don’t lose what you worked for to inflation and other larger forces. Sometimes I do find managing our growing portfolio to be a pain in the butt.  One time my hubby laughed at me when I groaned at the dropping interest rate on our accounts and he jokingly said that he used to manage his money by spending it and I should do the same and cut out all this stress.  I glared at him a bit and told him that the interest rate on his entertainment fund as prescribed by The Baglady Budget also dropped.  At that moment he screamed in a dramatic fashion, “Nooooooooooooooooo! SCREW YOU FEDERAL RESERVE! YOU STOLE my game money!”

Surprisingly after eight months of marriage, the hubby and I almost never fought about money issues even though he is more of a spender.  I think one reason that we do not fight about money is that we have no debt.  From what I have read in the news and heard from friends, the stress of debt is very draining and even debilitating. One woman wrote me saying that she feels like she is always behind on the bills and she hates that feeling because it is like she doesn’t have control over her own life.  Unfortunately sometimes it creates a vicious cycle because research showed that when we are sad we tend to spend more money than usual. When I watched the movie Maxed Out, I was shocked that people actually killed themselves over credit card debt. I can’t say I know how that feels,but I imagine it is extreme psychological torture for people to take such extreme measures.

I think will take the stress of saving money over the stress of debt any time of the day. I don’t mind that the hubby and others laugh at my Ferengi ways because I find it funny, too. I have also learned a lot about the world and the economy through my research into how to manage my money.  In the end, the work I put into saving money gives me a sense of security and well being. Every month I pay our bills and then add up the amounts in our various portfolios and give the hubby a short net worth report. It’s always good to know that we have a financial cushion to fall back on and we are  ahead of the bills, and I truly believe that it is good for our marriage.

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In part one I talked about dealing prejudice, and I got some pretty interesting comments. I encourage you guys to check it out. In this part I want to talk about the reasons why in some instances you shouldn’t try so hard to fit in. Granted, everyone wants to be “normal”, and I expressed that feeling in a previous post about sending children to school early. However, being “normal” is not always wise, and you shouldn’t follow along for the sake of being part of the majority.

It all started when I was a kid. I was never into fashion and I was fine with wearing things I picked out at church sales for 25 cents. Heck, I still have one of those shirts and I wear it sometimes. I have been teased about my clothing in elementary school, but it didn’t matter to me. I knew that having brand name clothes and shoes wouldn’t really affect my schoolwork and I had good friends anyway.  Additionally, my parents really didn’t have money to buy me new clothes so there was no reason for me to unnecessarily add to their expenses.

Now that I am an adult, I think I still tend to shy away from what is considered popular. For example, I still don’t have an iPod, and I don’t intend to ever get one. I could afford a very nice car, but I have no need for it. Considering how many of my coworkers have extremely luxury cars I would say that I am in the minority. I’m not in a car contest with them, so I don’t feel the need to join in and fit in. I have to confess that as a teenager I wanted a Porsche, but now I understand that fancy cars are not necessarily a mark of success because most of them are financed by debt.

Another way that I am a minority right now is that I am a renter. I have written quite a few articles on why I am not buying a house now, and I truly believe that in San Mateo County I am building more wealth by renting rather than buying. Even though I will buy a house some day, I think it is good to have a different mindset right now.   I know many people jumped in to real estate because everyone was doing it in the past couple years.  Now many of the same people are regretting their decisions.  So in the particular case of real estate, I am glad that my husband and I did not decide to buy anything when we got married even though our parents wanted us to.

Finally, what is scary to me is that in America debt is considered normal. Dave Ramsey actually has a funny sticker that says, “Debt is normal, be weird!”. So when it comes to things such as debt and fashion, I don’t mind being in the minority. In fact, I think many people would be much more successful than they already are if they stopped trying to fit in and do their own thing.  I know that peer pressure is a powerful force, but we have to be level headed and see if “normal” is really the best thing for our goals.

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Hello everyone, welcome to the Carnival of Twenty Something Finances for the week of April 7th, 2008. In this edition we have more than forty articles on a variety of financial subjects that twenty somethings could learn about. Read on for some financial enlightenment!

Editor’s Picks

Investing Man presents 10 Tips On How To Negotiate posted at Wealth Building Lessons. This reminds of my post where I said everyone should haggle. Investing Man’s article expands the idea to all types of negotiation.

Finance Girl presents Childhood Money Memories, Part I posted at Finance Gets Personal. Finance Girl followed my post and wrote about her childhood money memories. There are some great stories here!.

Monevator presents Four ways to stop a financial crisis derailing your money goals posted at Monevator.com. Monevator gives great advice about not panicking in this economic environment. This is a very detailed and well written article.

Tip Diva presents Tip Diva | Top Ten Tips - Going Dumpster Diving posted at Tip Diva. This is a pretty interesting list of tips. I haven’t gone dumpster diving, but in the past I have gotten clothes, furniture, and books that were discarded on the side of the street. I am wearing a pair of my neighbor’s unwanted jeans right now.

Sarah presents The cost of graduating where she discusses how expensive a diploma really is! I never got my diploma because I was too lazy to order it. I think it’s still in Sproul Hall somewhere and employers verify everything online these days so I never needed my physical paper diploma.

Budgeting & Saving

Heather Johnson presents 8 Ways Women Can Save the Whole Family Money posted at wpersonalfinance.

GBlogger gives us Silly Rabbit, Budgets Are For Kids—How We Do Use Budgets posted at Can We Get Rich on a Salary?

zork presents 15 Ways to Exercise Your Budget during Recession posted at It’s the Recession, Stupid!.

Dividend Growth Investor presents Back test Results of one Rule of Thumb posted at Dividend Growth Investor.

Livingalmostlarge presents Budget backwards with priorities posted at LivingAlmostLarge.

Faron Benoit presents Establish Financial Goals posted at Financial Learn.

Seb presents Five things you should buy used posted at Pinching Copper.

Credit and Debt

Michael Bass presents What You Should Know About Credit Cards posted at Debt Prison.

Steve Faber presents - How to Get Out of Debt Fast posted at Debt Free.

FIRE Finance presents Three Quick Steps To Get Out of Debt! posted at FIRE Finance.

Shuchong presents I Thought it was Supposed to be Good Debt! posted at But WHY Doesn’t it Grow on Trees?.

Ray presents How To Avoid A 0% Balance Transfer Mistake posted at Money Blue Book.

Michael Bass presents What You Should Know About Credit Cards posted at Debt Prison.

College

Ted presents Cheapest Textbooks Online posted at CampusGrotto College News.

Patrick A. Sizemore presents 10 Guilt-Free Splurges for Students posted at College Information for Smart Students.

Realm of Prosperity presents Great Financial Aid Advice For College Students!!! posted at Realm of Prosperity.

Career and Income

Shanti presents WWSD #3: How Can I Work at Home Successfully? posted at Antishay Ventenne.

Tracy Kiss presents Conscious Flex: How to Find Your Passion and Make It Your Career: by Nicholas Powiull posted at Conscious Flex.

Passive Income Investor presents How I Generated $2,667 In Passive Income Last Month posted at LIVING OFF DIVIDENDS & PASSIVE INCOME.

Karin Verbeek presents From Nine-to-Five - That?s All You Need posted at Time Management Blog.

Economy

Wenchypoo presents Inflation—Here We Go Again posted at Wisdom From Wenchypoo’s Mental Wastebasket.

Free Stuff

Sally Thompson presents The Freeloader?s Toolbelt: 50 Tools to Help You Get Anything Free Online posted at Free Geekery.

Investing

Rio presents The Easiest Way to a Start a Roth IRA [del.icio.us] posted at Get Financially Fit!.

Charles H. Green presents Great Moments in Self-Regulation: Financial Planners and CFP Board posted at Trust Matters.

David Carter presents Why I Invested in Gold posted at David Makes Cents .com.

Richard M. Rothschild presents Bond Market Index Funds posted at Bond Market Index Funds.

Jorge H. presents Have We Hit the Bottom? posted at My Adventures into The Street.

Moneywise presents Largest mutual funds and their expenses posted at The Real Returns.

Real Estate

Ana presents Foreclosure Crisis Means A Buyers Market posted at DebtFREE-Revolution.

Dorian Wales presents The Personal Financier: How to Make Sure this is your Dream Home: 7 Practical Tips posted at Personal Financier.

Roshawn Watson presents Is Home Ownership A Good Investment? posted at Watson Inc.

Other

David presents $10 Bus Fares: Frugal or Frightening? — Money Under 30 posted at Money Under 30.

KCLau presents Financial Security: How you feel it? posted at KCLau’s Money Tips.

That is all for this edition. Thank you all for submitting your wonderful articles and make sure to link back and promote the carnival via social bookmarks! If you want to participate in the next carnival it will happen in two weeks and you can submit your articles here.

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I am sure that most Americans are quite excited about the tax rebates that may be coming soon this year due to a major economical stimulus package. What is lesser known about this package is that it will also raise the “conforming” mortgage loan limit from $417,000 to $729,750 in high priced regions until the end of this year. This means that government sponsored enterprises such as Freddie Mac and Fannie Mae will be able to purchase loans as large as $729,750, and any loan under this limit will not be a jumbo loan. Basically, people will be able to borrow more money and pay less interest. Who is cheering for this change and why? More importantly, how will you be affected?

Opposing Views on the Issue

What I found interesting is that the National Association of Realtors put out an extremely positive review about this move stating that “NAR’s research found that simply increasing the loan limits for Fannie Mae and Freddie Mac to $625,000 would permit as many as 300,000 families to enter the housing market, reduce foreclosures by as many as 210,000 and allow as many as 500,000 jumbo loan borrowers to refinance to lower cost loans, saving these people $274 to $411 a month.” On the other hand, this article states that “the director of the Office of Federal Housing Enterprise Oversight (OFHEO), which is the governing body over America’s government-sponsored enterprises (GSEs), warned the Senate Banking, Housing and Urban Affairs Committee this week about expanding the GSEs’ ability to take on jumbo loans without first having the appropriate stipulations and regulatory structures in place.”

Who should we believe? The glowing report of an association of realtors who have lobbied for the change or the director of a branch of the government that has been tracking housing prices and demographics for more than three decades? I personally believe that the director of OFHEO’s opinion is prudent and logical. With bigger loans, the government sponsored enterprises will be taking on more risk, and if these agencies are destablized by more risky debt then the entire economy could collapse even further.

Best Case Scenario for the Average American

The best case senario I see is that nothing really happens and very few loans get funded under the new limit. These few homeowners will benefit from the lower rate and keep on paying their bills. Hopefully, the paltry number of these homeowners will not affect the housing market in any significant way. The prices of houses continue to decline for a while making homes more affordable and lowering the need for jumbo loans. Basically, the best we can hope for is that nothing changes.

Worst Case Scenario for the Average American

Unfortunately, I think it is possible that this footnote to the stimulus package could have a devastating effect on the current mortgage crisis. First, it may prolong the bubblicious prices in California and the Northeast. Right now I am reading many stories where offers on homes fell through because of the lack of financing. Considering the fact that the average price of shacks in my neighborhood is $700k to $800k, most of these buyers are trying to secure jumbo loans. Once this package goes through, financing will be possible, and the prices on the shacks will not come down as quickly. Even though this higher limit is only in effect for one year, it is possible that more speculators and fraudsters will get into the market and drive prices up even higher. After all, it only took about two years (2004 to 2006) for home prices to double in many parts of California. You may say that this is not a problem for the rest of America, but if Freddie Mac and Fannie Mae become insolvent because of more risky debt, then all Americans will have to pay dearly with mandatory bailouts. Then we can kiss that tax rebate and even more money goodbye.

What I Think Should Happen

I am not an expert, but I firmly believe that what we need is more affordable homes, and not larger loans. So it is probalby best if the limit was left alone and the ridiculous prices fell back down to earth. I think it is ludicrous that the “conforming” loan limit is being lifted more than $300,000 in this package in the blink of an eye considering that it took a span of 23 years for the loan limit to go up from $115k to $417k. Is more debt really good for Americans? What do you think should happen?

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