Getting out of Debt Advice

[JJHardy7]

It seems like you're setting yourself up to HAVE to go back to the credit cards because you're not sufficiently prepared and take a huge step back in your efforts, if not completely derail them.

 

This is sort of what I'm thinking too. I agree with homer as well. A guy I work with just went through some terrible bad luck. He needed major dental work done (it was some type of emergency...either do it or lose the tooth) of some sort (I guess the dentist said it was a freak thing since he goes to the dentist regularly and everything). That was going to set him back some. The day before he actually had the surgery he got in a car accident (not his fault). I can say with certainty that $1,000 would not cover his expenses.

[homer]

This isn't really a "get out of debt tip" but one thing I'm very fastidious about is saving my spare change. Once a year I cash it in and use it to buy Christmas gifts. You'd be surprised how much you collect in a year. For me it averages about $200.

[olliegjw]

I agree with the $1000 emergency fund. The only way it makes sense to have a 3-6 month fund, is if the "fund" is earning a higher rate of return than the interest you are paying on the debt. If you put all the money that would have gone to an emergency fund towards credit card debt, you will be much better off. If an emergency comes up, you have the excess room on the credit card to pay off the emergency.

[LouisEly]

If you are absolutely sure about the stability of your employment for the next 2-3 years (in this economy that can't be too many occupations other than health care), then I can buy the $1000 emergency cash fund and put the rest towards debt. I understand the concept - if you put it towards debt that is accruing interest, you are saving the interest in the long run which you can put back into the emergency cash fund at a later date. Generally speaking I endorse the 3-6 month minimum emergency cash fund.

 

I would make sure though that the amount of emergency cash fund plus unemployment equals what you need to survive (rent/mortgage, food, necessary utilities - power/water/gas) for at least three months, unless you have close relatives nearby whom you could live with temporarily in case of a lost job.

[dadofandrew]

I would lean toward the $1000 emergency fund as being realistic for many...most folks just use credit cards for their "emergency" fund. Especially if you are single, I'd go light on that and pay down debt.

[MHgb]

SELL THE FREAKING CAR. $550 /mo for a vehicle is disgusting - i bought a car over 2 years ago. i was ok with the high payments at the time because after 3 years, i would have about 35-40k miles on my car and i would have zero car payments. and i would have that car for another 5+ years, and to me that was worth it. so i do plan on having it for a LONG time. i dont mean to offend anyone here, but i wanted my first car to be a new car that i liked. i had been borrowing cars and using my mom's car for too long.

 

Cars lose 60% of their value the first 4 years you own it. You in your finanicial situation should have been the person to buy the vehicle "60% off" with 50,000 miles on it. Very few people can afford to purchase a new car and throw away 60% of what you put into it so quickly. Cars are not investments.

 

You had been borrowing cars for a while, and you probably needed your own vehicle. Instead of thinking "I wanted my first car to be a new car that I liked," you should have been thinking "I want my first car to be a car the I like that won't keep me in debt for 10 years so that in those 10 years I could have used all the money I saved on my vehicle purchase to pay off all my debt and have money saved up for my house and my wedding so I can live for those 10 years in happiness instead of living for 3 months with my clothes drenched in the aroma of the new car smell." Those new car smell air fresheners are like 3 for 99 cents. You could have packed your used vehicle's trunk full of them.

 

I bought a 4-year-old car in high school with 40k miles...paid $7,500 for it with money I had saved. Now 9 years later, I'm still driving it with 180,000 miles, and it runs like Usain Bolt. All I'm ever going to be out is my $7500. If you paid $15k, you're out that $7500 in just a few years.

 

I don't know if at this point the advice would be to sell your car because I haven't kept track of what you paid/how much you have in it/how much you have left to pay, and frankly, it doesn't seem like you would do that anyway. But I think you do need to re-examine your thought process by learning from your mistakes so that the next 10 years are full of wedded bliss.

 

Live like no one else so later you can live like no one else.

[Menotti80]

an alternative thought process of the whole car thing would have probably have left me better off at this point. i am more concerned about going forward, because I am not going to kick myself for buying a car 27 months ago.

 

but even the advice of what i probably "should have done" will help me going forward, so once again, i appreciate it!

[FVBrewerFan]

Plus, if having a nicer car is important to you there's nothing wrong with having some short term debt as a result. There was a period in my life when that was real important. When you think about, very few things we spend money on are necessities. A nice car, eating out, more and nicer clothes, Xbox, cell phones, etc.

 

That's what makes it so hard to stay on budget, there are so many goods and services to spend our money on these days. The key is, you made the choice on the car, now you have to cut back in other areas. Or, as I prefer, find a way to create more income.

[valpocrewsader]

there's nothing wrong with having some short term debt

You can have that opinion, obviously there are others who disagree. Debt assumes risk, having a paid-for $5,000 car in your driveway gives you indisputable security you don't have when $20,000 spread over 60 months' of payments (!!!) is sitting in your driveway. Five years is a long time to roll the dice that no matter what happens in your life -- job loss, medical issue, other unplanned financial emergencies -- you'll be able to feed this beast on top of paying for necessities like shelter, food, lights, and heat.

 

Then you factor in the stupidity of paying all that interest to the bank (perhaps partially offset by higher maintenance budget for the used car, granted) and the massive depreciation hit the car takes (nothing offsets this massive net worth killer), and I can find a lot of things "wrong" with taking on car debt.

 

Then again, you did not define what you meant by "short term". Obviously, choosing to rack up a little debt that can be repaid in less than a year so you're diving a $5,000 car instead of a $1,000 would be on a different (infinitely smarter) level than the $20,000 for 48-72 months example.

[MJLiverock]

Or one can look at a car, cable TV, vacations, etc. as worth it to have a life worth living. Everyone could get by on Ramen noodles, living in a dump, biking/biking/walking/ driving an old clunker, splittiing the layers of toliet paper etc. and die a lonely old man living on cat food so they can leave millions of dollars to some charity or their family having spent their life in misery just to show how much they could save. If someone spends their whole life trying to do everything as cheaply as possible and never spends, they likely won't spend in retirement either because they are alway worried about tomorrow and have the mentality ingrained in their soul after 50 years.

 

I have a 73 year old client who was a great saver his whole life, made a good living, had few debts and is now retired. It is like pulling teeth to get him to take money from his IRA to live on. He complains constanly about not saving money anymore and spending his savings. His wife is depressed because she wants to travel a bit while they still can health wise, wants to have some new furniture after 20 years of use and he won't budge on his "gotta save every dime" attitude.

 

It always comes down to moderation just like many things in life. Live within your means, spend money on things you truly enjoy, and make smart decisions regarding risk. So called Guru's like Dave Ramsey and Suze Orman tend to just preach common sense with a little pie in the sky returns expectations all the while selling you something as they tell you not to spend money on anything. Some people need to hear that stuff but it really isn't anything earth shattering.

 

I have advanded degrees in finance and economics and read one of Suze Orman's books back in college and it was rife with errors and half truths about financial topics. Her show was a joke and her own career in investment's flamed out long ago before she became some guru. I checked out Ramsey's stuff a little online and he uses the same common sense stuff but adds in some ridiculous return expectations of 12% for retirement assets while at the same time being a shill for high cost investment management. I am alwyas wary of anyone receiving payment for recommending investment advisors or mutual funds because they typically end up recommending high cost underperforming funds or advisors rather than best available or best fit for a person.

 

The so called self helpers tell you don't spend money on anything. I have a car loan, it is at 0.9% interest for 5 years which in the long and short run makes sense for me because I can earn more than 0.9% interest on my money for the 5 year period. Not all debt is bad, especially mortgage debt which allows a person to lower the interest by the amount of tax deductions at their marginal rate, and lets they buy a house years before saving up to do so, thereby avoiding rents which afford no principal increase due to property appreciation or tax benefits. Renting is literally thowing money down a hole and can be even worse than some ridiculously expensive car loan.

 

Either way, not all debt is bad, and not all spending is wasteful. People need to prioritize and be smart about spending and living within means. I would agree that carrying a balance on a credit card is pretty dumb and probably either the result of spending money on things one couldn't really afford, or an emergency. That $1000 savings won't cover squat in true emergency, car repairs, medical expenses, home repairs, can pretty easily surpass that amount but having room on the credit card to absorb the cost and provide the safety net probably makes the most sense rather than hoping your leaky roof or blown head gasket won't eat up the meager savings.

[homer]

I have a 73 year old client who was a great saver his whole life, made a good living, had few debts and is now retired. It is like pulling teeth to get him to take money from his IRA to live on. He complains constanly about not saving money anymore and spending his savings. His wife is depressed because she wants to travel a bit while they still can health wise, wants to have some new furniture after 20 years of use and he won't budge on his "gotta save every dime" attitude. \

_________________

 

That could also be chalked up to generational differences. This dude's fearliest memories were formed during the Great Depression when people scratched and clawed for everything they had.

[ewizabeff]

I know "fearliest" was probably a typo....but I think that's a great word.

[FVBrewerFan]

there's nothing wrong with having some short term debt

You can have that opinion, obviously there are others who disagree. Debt assumes risk, having a paid-for $5,000 car in your driveway gives you indisputable security you don't have when $20,000 spread over 60 months' of payments (!!!) is sitting in your driveway. Five years is a long time to roll the dice that no matter what happens in your life -- job loss, medical issue, other unplanned financial emergencies -- you'll be able to feed this beast on top of paying for necessities like shelter, food, lights, and heat.

Yes, of course. But I refuse to go through life worried about the worst case scenerio. Then one should never have a mortgage, because how can you pay for that burden if you have financial emergencies? Besides, worst case, if you lose your job and can't pay for the car, the repo man can have it.

 

I've had $3,000 cars before, and now I've made the choice to have (and pay for) something much nicer. I agree with what MJ said. My parents are retired and could travel much more than they have been. And they love to travel. But they are so terified of the worst case that they hoard their money. You need to have balance in your life, and learn to say no sometimes, and reward yourself sometimes. I will never carry a balance on a credit card. I will never have a mortgage with a term longer than 15 years. And I will never spend money trageted for retirement. But I will buy an Infiniti G, I will blow ongodly money on a vacation, and I will buy Kraft Mac & Cheese instead of the store brand. There are no absolutes, we all have to do what works in our own personal situations.

[JJHardy7]

Debt assumes risk, having a paid-for $5,000 car in your driveway gives you indisputable security you don't have when $20,000 spread over 60 months' of payments (!!!) is sitting in your driveway.

 

I drive a car that is 12 years old...but I appreciate new cars as well. If you buy a new car, take on the debt (which by the way right now you could get a 0.0% interest rate...aka free money when considering TVM), and keep the car for awhile...it's not the end of the world. A new car now also comes with a ton of warranties, etc. It's not like if you buy a new car you'll be struck by lightning. Buying a new car isn't ideal because of depreciation (Ramsey says that, but again Ramsey isn't a genius...he just has made a ton of money speaking about common sense...I do give the guy a lot of credit for that and wish I thought of it http://forum.brewerfan.net/images/smilies/wink.gif ), but it can 'pay off' in the long-run. Vehicle purchases come down to how long you'll have the vehicle...you really can buy used cars and trade them in for decent value if you time it right. In other words, you can manage it.

 

That could also be chalked up to generational differences. This dude's fearliest memories were formed during the Great Depression when people scratched and clawed for everything they had.

 

Agree 100%

[valpocrewsader]

MJ, your post quickly entered strawman territory. Never would I advocate living like a pauper for the REST OF YOUR LIFE. Au contraire, the idea is to merely live as spartan as possible until non-house debt is out of your life since non-house debt cripples your ability to build wealth and destines you to an endless cycle where you build no traction. While everyone else looks rich but is really poor by financing this and that, you can spend just a year or two looking poor and then sail into the sunset. A very small bit of sacrifice, say 24 months, and you put youself into position where you can live comfortably with a big emergency fund, a modest house payment as your only payment, and plenty of money leftover to put towards retirement, invest/save for other purposes, give to charities, spend on FUN, and pay off the house.

 

But I refuse to go through life worried about the worst case scenerio. Then one should never have a mortgage, because how can you pay for that burden if you have financial emergencies?

 

The risk associated with taking on a home mortgage is balanced by the fact that a home goes up in value. The depreciation of a vehicle makes buying a new car a bad idea even if you're paying cash (unless you're worth a million dollars) -- to finance an asset that will knowingly plummet in value just seems reckless.

 

There are no absolutes, we all have to do what works in our own personal situations.

 

True dat. This forum thread is asking for advice, so I'll gladly lay out everything I believe in. To each their own. Heck, I've ignored some of my own preachings . (But I wish I hadn't!)

[valpocrewsader]

On the topic of vehicles, I wanted to share this video/slideshow: http://www.daveramsey.com/etc/lms/drive_free/player.cfm

 

It's a little over simplified, and I know some will have a major hangup with the cavalier attitude that tucking money in a mutual fund guarantees earning 12%*, but overall this presentation just does a fantastic job of demonstrating the wealth-building power you could be forfeiting by financing new cars or leasing. I think it really hits home.

 

 

*In general, I see the 12% figure dogged a lot. Ramsey uses it, whereas I more often see 10% being the general consensus. Still, even if you take any piece of advice given under the guise of 12% return and immediately assume it's wrong and adjust to 10% or 9%, the counsel still holds up and you're still in a pretty great place at the end! In the above slideshow, I do think it's a little misleading to talk about such a high return in the context of a small window like 5 years -- things are just way too volatile in a small stretch like that, some 5 year periods could be 3% return while others could be 18% return -- but the general principle still applies and the over-arching point is to be investing for the long haul anyways where you'll get that 10%.

[craigharmann]

valpocrewsader wrote:

Never would I advocate living like a pauper for the REST OF YOUR LIFE.

Amen!! Because I put everything (and I mean EVERYTHING) I did on plastic in college and my first few years out, I'm left with a mountain of debt. I lived far beyond my means. Now, we have had to scale back a whole lot, live within a budget, and make sacrifices. I've had to do without ESPN, because we switched to the "family" plan on Directv, because it was cheaper, and I'm still looking for cheaper TV options, because the wife wants her TV. I've sold my golf clubs, my PS2, and have rifled through my CD collection, all in an effort to scale back in life. We will probably have to live this way for about 2-3 years, to get out from under this mountain, and I'm far from excited by it. But I've learned from my mistakes, and once we get out from under the mountain, we will be able to go on trips, do what we want, as long as we save up for it. I bought into the lie that the world sells that stuff is good and you have to have it now. I've realized that is far from true.

[Invader3K]

I have a 73 year old client who was a great saver his whole life, made a good living, had few debts and is now retired. It is like pulling teeth to get him to take money from his IRA to live on. He complains constanly about not saving money anymore and spending his savings. His wife is depressed because she wants to travel a bit while they still can health wise, wants to have some new furniture after 20 years of use and he won't budge on his "gotta save every dime" attitude.

 

This is kind of sad. Reminds me of one of my wife's relatives who just passed away. This woman was around 95 or so, and her husband was a WW I (I think) veteran who had passed away in the '70s. She had lived extremely frugally, pretty much seemed like she had nothing. Anyway, when they were cleaning out her place, they found hundreds of pension checks from the army she had never bothered to cash. Seems like she probably did it just so people would feel sorry for her.

 

That's not really relevant to most of this conversation, but it just got me thinking a bit.

[MJLiverock]

I wasnt' trying to enter strawman area valpo but I tend to have a problem with the cult of personality that people like Ramsey and Orman develop. They don't say anything original or earth shattering, much of it is common sense, and readily available for free but they caution people on spending money on everyhting yet are trying to sell you something or recomending high cost investment options with unrealistic risk reward expectations set in people's minds. The key to any investment return is in the risk reward area and these gurus usually don't discuss it so people understand it or they miss represent it, while raking in cash by shilling their buddies investment advisory services that may or may not be any good, may charge higher fees than others, or pay a referral fee to Ramsey or whomever.

 

I brought the line of spend money on what you truly enjoy as a better guide than never take a car loan, or take your lunch to work every day because to some people those expenses are worth it and provide enjoyment of life. They may make sacrifices elsewhere to live within their means but to me scrimping and saving everything leads to a boring life and is a practice that is hard to get out of which is why I brought up my client. He did it for 50 years and now that he has reached his retirement goal he still can't enjoy it because he just can't bear to spend the money he has accumulated. As was mentioned, living life in fear of the worst case scenario isn't fun either, just like never saving anything for the future.

 

I used to joke when I was living in a crappy apartment just out of college making next to nothing at a bank that I would go without heat before cutting cable. I could put on a sweater and a blanket but I wanted ESPN and such. It just comes down to value added for each person. Everything person buys or spends money on doesn't need to be an investment, a car has a certain utility that varies from person to person and impacts other choices like valuation of time (i.e. take public transportaton, how far to live from work, etc.)

 

BTW from a few posts:

"That could also be chalked up to generational differences. This dude's fearliest memories were formed during the Great Depression when people scratched and clawed for everything they had."

 

I know it is hard to believe but people that can actually remember the Great Depression are getting fewer and fewer. My client was born in 1936, he really doesn't have any memories of the Great Depression, he was only 5 when Pearl Harbor was bombed which was a few years after the Depression ended. I do have one client who is 87 and she remembers the Depression and her favorite saying this year and last has been, "I remember the Great Depression and this ain't it." She has some amazing stories about growing up then and having to barter for everything because there was no physical money to be had.

[Teatoe993]

An easy way to get around the depreciation of cars is to buy a classic car. I have three (1961, 1963, 1973) and a $500 winter beater. As long as you maintain a classic car, it will never lose value and more than likely go up in value. Depending what you get, they can be much cheaper to maintain than a modern car, and are simple enough to maintain yourself. Insurance is cheap. They are like savings accounts on wheels. My fiance gets on me a lot because I live right at my absolute means financially. All my income goes to paying off bills, investing, luxuries, etc. None of it really ever goes to savings. If I ever get into a jam, I'll just sell a car or two. Because the cars are my emergency savings, emergency savings that I enjoy as daily transportation.

I know this is thinking way out of the box, but it works for me.

[homer]

I know "fearliest" was probably a typo....but I think that's a great word.

Yes, a typo but a pretty cool one if I do say so myself!

[davego]

All I know is that I haven't had a car payment since April and will kill my last CC in March. God willing, the only debt I'll ever have again is on property. The best vehicle is a paid for one.

[bball123h]

So I just opened an awesome notice from one of our credit card companies. First, our situation:

 

$10k in CC debt, $30k available (over 3 cards)

Card A: $2,000/$7,000 (13% APR)

Card B: $3,000/$10,000 (0% till April)

Card C: $5,000/$12,000 (9 % APR)

$2k in savings, adding $600/month

paying $1500/month toward the CCs

 

Card C just sent us a notice that they are jacking our interest rate from 9% to 19%, because they're really nice people and know how to maintain a customer relationship (I've been with that bank for 16 years, and I'm 26). I do have the ability to opt out of the increase in APR, however that would mean closing the account.

 

We were planning on buying a home next summer. Should I opt out? By the time we'd be pursuing a mortgage, our balance on the cards should be 0. However, being our oldest card, it will have some impact on our credit score. I tried to find a good site to estimate the impact of closing the card, but have had no success finding info.

[ewizabeff]

This is by no means official, but from what I've heard the impact on your credit rating is only for a few months. Maybe look into some of the NPR radio shows' online content? That's where I get a lot of my info.

 

Alternately, could you transfer the balance to the 0% card for a smaller fee than the increased interest?

[LouisEly]

I have advanded degrees in finance and economics and read one of Suze Orman's books back in college and it was rife with errors and half truths about financial topics.

 

Amen brother.

 

Everyone could get by on Ramen noodles, living in a dump, biking/biking/walking/ driving an old clunker, splittiing the layers of toliet paper etc. and die a lonely old man living on cat food so they can leave millions of dollars to some charity or their family having spent their life in misery just to show how much they could save.

 

Afreakinmen - preach on brother!

 

I have a car loan, it is at 0.9% interest for 5 years which in the long and short run makes sense for me because I can earn more than 0.9% interest on my money for the 5 year period.

 

Well... yes, 0.9% is basically free, but I think it was either John D. Rockefeller or J.P. Morgan who once said buy things that appreciate, lease things that depreciate. For new cars I advocate leasing, but for used cars (if you run them into the ground) I'll go along with buying (as long as someone else took out most of the depreciation).

 

Renting is literally thowing money down a hole and can be even worse than some ridiculously expensive car loan.

 

Hmmm... I have to disagree with you there. The average real estate appreciation over any significant period of time is 5%, so even at todays 5% loan rates you are breaking even; you can deduct the interest, which decreases every year, but you have to pay for any repairs/upgrades/etc., which you can't deduct. (And if you can deduct, you only get at most 35% of the interest on what you spend back, for most people 20%.) Meanwhile you can take any 25 year period of the stock market and get at least 9% returns; so if one were to save $500 per month by renting (and with renting you don't have to pay for any repairs/upgrades/etc.) and invest it in the stock market at 9%, after 30 years you will have over $815K. The problem is that few people have the discipline to invest the difference. Of course it is all relative - depends on what the housing market is. If you bought a house at $250K and it appreciated at 5% per year for 30 years, it would be worth $1M (less the future value of money spent on repairs/upgrades). However where I live, the difference between renting and owning is at least $1000/month, which invested at 9% over 30 years would be worth $1.63M. Few people have that $1000 per month, and fewer can save up the money to make the $80-100K down payment (otherwise add an extra $150/month in PMI which you can't deduct). Add in that PMI and make it $1200/month that you are saving equals just under $2M that you would have if you invested the difference in rent, which is the same as a $500K house would have that appreciated 5% per year over 30 years.

 

Rent is just as good as owning if you invest the difference; the problem is that few people invest the difference.