Children are taught, from the youngest age, to build their credit. Rather than teaching money management, they are taught how to join the world of debt. Have you ever heard, “you have to build your credit”? Emerging adults are told to get credit so you build your credit. Hmm, sounds like a life of debt!
Good Debt
There is only one acceptable debt in money management. That debt is a mortgage to buy a house. Even this debt, according to finance gurus like Dave Ramsey, is avoidable. However, I believe this one is acceptable but should be handled in the quickest payoff possible.
House mortgages should never be more than 15 years long. With a 15 year mortgage, you will make less excuses to not have it paid off in the 15 years. Many people fall into the trap of getting smaller payments with a 30 year mortgage. Only buy a house you can afford to make payments for 15 years. If you cannot do this, buy a cheaper house or wait until you can afford to make the payments.
Even with a 15 year mortgage, you should try to throw as much money as you can toward paying off the loan quickly. Once you own a house outright, that money can now be used to save money and build a nice nest egg. Saving money is important all the time but not at the cost of carrying debt for longer.
The title of this section is a little misleading, there really is no good debt, If you can save up and buy a house for cash, this is the optimal way to do it. However, most people can not so that is why I list it as good (acceptable).
Bad Debt
The worse debt is the debt on items that depreciate or have no value after you buy it. One example of the worse debt to have is a car payment. Buying a new car is great but the value depreciates as soon as you pull off the lot. Many people end up with way more car than they can afford. In a year or two, the consumer owes more on a loan than they can get back if they sold the car.
If you insist on a new car, pay yourself by saving up ahead and paying cash. Better yet, buy used and let someone else lose out on the depreciation. There is not just the savings from the depreciation, often times the new car issues are resolved by time the used car is sold.
Buying dinner with a credit card is another huge no no. Unless you pay off all credit cards before interest is charged, cut them up and throw them away. I know people who are thousands of dollars in debt because of vacations, dinners, gifts, and just fun spending. Now they have nothing tangible to show for the purchase except for years of interest and payments.
These are the kinds of thing smart people who want to keep their money earnings are trying to avoid, Paying yourself first by paying cash, saving money, and only buying what you can afford will give you long term financial freedom.
Avoidable if Possible Debt
One category that brings up a gray area is education. Many people take out loans and end acquiring debt to pay for college. This kind of debt seems like a good idea but many students end up with lumps of student loans for years following graduation. The more degrees one gets, the higher the loan amounts and the higher the debt.
Student loan debt should be avoided at all cost of possible. Paying as you go is a great option as an adult. It may take longer but you will remain debt free. As a student fresh out of high school, there are a few options. Parents can start saving early on for their child’s education. Many programs are out there like 529 savings programs. Many of these programs offer tax savings on the accounts as the money is saved for education. Make sure to read all requirements before signing up for any program or account.
Other ways is make the child work during college to help pay for their own schooling. Many colleges offer work programs to help earn money right on campus. By doing this, parents can pay some part and the students the rest. Choosing a State school will help keep the cost lower also.
Additional ways are for the student to apply themselves in high school to earn scholarships which will pay for a chunk of college. Now days there is millions of dollars floating out there for students. Have your child apply for as many as they can. Look for grants, free government programs, and any other way that can help pay for college. This will allow the student a clean slate in life and relieve the parents of long term debt.
Cash is King
Anytime in life, you want to buy something, follow this list:
- Do I need this?
- If I just want it, can I afford to pay cash for it?
- Will this improve my life?
- Have I compared prices?
- Is there a cheaper alternative?
- Pay CASH!
This list is quite simple but taking a cooling off period to look at this list may save you from buyer remorse. Raise you hand if you have cabinets full of the latest greatest appliance you just had to have and you only used them a handful of times. Sorry, because you are not on a live webcam, I cannot see you hand! lol
If you want it, you can have cash not meant for something else, and you go through the above list, by all means, buy it. Life should be fun and buying stuff you just want can add to that fun. However, not if it means debt or that you are not paying your other obligations.
Cash should be you first choice for paying anything. It is more real than a credit or debit card, You feel the emotion as you release the bills from your hand. This alone may cause you to not buy something that you think you need right now.
Debt Sucks
Owing someone else money is the worse feeling one can have. Because of debt, working is done just to pay someone else. Cleaning up all your debt will result in you starting to pay yourself. Saving money for a car, house, or anything else you want gives you a new freedom that will be the best feeling you can have.
Please check back here for more information on saving money, earning money, and paying off debt. MoneySavin.com was created to help people and share my own stories on how to save money. The only way this blog works ios if you the reader are part of it. Please share any comments below.
Peace out!
Tom
