DEBT: The Good, The Bad, and the Ugly
May 7th, 2021 by D.C. Poc
The word ‘debt’ just sounds bad. It has such a strong negative connotation in society, yet, people are overtly encouraged to saddle themselves with as much of it as possible, and in some cases, even more than is possible. Not all forms of debt are bad, and some forms are actually good, so we’ll give you an overview of some of these different types of debt.
The most necessary debt of all. You need somewhere to live, a house can be a sound long-term investment, why not buy one at a rate of 3% interest? For me, personally, the best part of my day is when I pull into my driveway after a long day at work knowing my pool is waiting for me. My wife and I have spent a lot of time, effort, and money turning this place into a home, and I can’t imagine it any other way. This is the place we’ll raise our kids, bury our dogs, and likely retire. It’s not soon to be forgotten.
The key here is due diligence. Research the area you're buying in, school ratings, public safety, historical values, future zoning changes, etc. Once you have narrowed down what you are looking for and where you are looking, find a mortgage lender that can A) provide a great rate and B) limit lender fees and closing costs. And oh yeah, DON’T OVERBORROW. I’m not going to provide a percentage of income you should spend on your house or anything of the sort. But please, make sure this is in your budget and affordable to you. Make sure it fits in your financial plan. That’s the Wealthy Idiots way.
As a side note, American’s hold approximately $10 trillion dollars in mortgage debt according to the Motley Fool. This should make you feel a tad bit better about taking on a $150k mortgage.
Additionally, mortgages can also be very beneficial when you are buying INVESTMENT PROPERTIES! Yes, that’s right, why pay cash when you can leverage someone else’s money to build your rental empire. By using mortgages for this, you are preserving cash while your tenants pay the mortgage for, hopefully, years on end. Do you know what 30 years of tenants paying your mortgage looks like? A paid off house that you didn’t personally shell out any payments for. This is the epitome of a “WIN-WIN” scenario.
According to Experian, U.S. automobile debt has climbed to almost $1.7 trillion! This is an absolutely staggering amount of money. Most people in the U.S. own a car, and rightfully so. You can drive nearly anywhere within the continental U.S. Car loans are one of the most common forms of consumer debt, and honestly, they are not the worst, but can be dreadful if the terms, purchase price, or reliability/longevity of the vehicle isn’t good. Car loans typically range from 0% to 6% but, in extreme circumstances of bad credit, can exceed 20%. It is not unreasonable for a family of four to have a single car loan at any given time. Personally, that has been the rule in our household since we got married. Today, we have no car loans and it looks like things will stay that way for the next five years or so, God willing. If you haven’t experienced a life free of car loans during adulthood, you should give it a shot! It’s liberating.
These are slippery. Credit cards, if not maintained with a watchful eye, can get away from us quickly. The ease of swiping, inserting, or now tapping the card makes spending money seem without consequence. This could not be further from the truth. With credit card interest rates ranging from 7% to 30%, this debt can quickly spiral out of control into a life-altering lesson that cannot be quickly undone. Be cautious.
With that said, our family uses credit cards for every expense that is payable by credit. Because of this, we earn huge rewards. Currently, we are using the DiscoverIt card, which has 5% bonus categories every quarter and matches all of your cash back after the first year. This is slated to be around $1000-$1200 on our card anniversary in February. To control this, we ensure that the cards are paid in full each statement period, avoiding interest altogether. In fact, I don’t think we have paid interest on a credit card purchase in nearly 5 years.
I’m thankful I don’t really have any personal experience with these. We took a $5,000 loan that was later eligible for forgiveness due to my wife being a teacher, but minus that, I don’t have much knowledge on them. Student loans can be burdensome. Jobs that would normally be very lucrative upon graduation, seem much more pedestrian when the student loan payments are factored in. These loans should be attacked with everything you’ve got. Rid yourself of them as soon as you can. Bobby over at the Millennial Money Man can give you some more specific advice on how to do this. He’s a student loan guru, and there is a lot to be learned from his story.
Advice for prospective students: apply for every scholarship you can, work as much as possible while attending school, and limit your loans as best as possible. Just lowering your total loan amount from $100k to $80k can make a huge difference on your ability to pay them off. Pinch every penny here. NOTE: we understand you can’t work at the grocery store while also attending med school, but you get the point.
In the words of the famous Michael Scott from the hit sitcom ‘The Office’, “No God, Please, NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!”. I can’t come up with a single logical reason why someone would resort to payday loans. These are so, so expensive. You might as well go to a loan shark (okay, please don’t do that, either). I don’t really have much else to say on this, except that it is the worst kind of debt, and it should be avoided at all costs, seriously. If you can’t recognize these companies, they are the ones that pop up on every corner and are named things like “Title Loans Plus”, and “Instant Cash Today”, etc.
Random consumer financing
This includes things like financing furniture, purchases at your big box stores like that 75” TV you’re eyeing, or many other things. These items are often labeled as “rent to own” or “no payments for 3 months”, or “12 months interest free”. Companies use these tactics specifically on people that are buying above their means. They are counting on you making interest payments to them at some point, or they wouldn’t be extending the credit. Keep an eye on these, and please, for the sake of everything that is good, don’t rent your TV.
This isn’t an article about avoiding debt. Rather, we encourage you to choose your debt wisely. There are all kinds of scams out there that we could also add to this article, but we can’t always protect you from yourself. If it sounds like “only 12 easy payments of $49.99, OR, “you can be making $1,000 a week in just 3 months”, you should probably start off by being skeptical. Keep your head up, keep reading Wealthy Idiots, and watch that debt!
D.C. joined the Marine Corps right out of high school. When he left active duty, after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time) he quickly realized he needed to learn how to save to secure his future. After nearly ten years of research, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!