posted
I'm operating in a different universe by suggesting he take a simple step, recommended by numerous other posters and people in general, that will simplify his financial life (as evidenced by it doing so for numerous other posters) and likely save him thousands of dollars in the long run?
And you're not by recommending he live his life in a highly non-typical fashion?
Btw, I rather think the headaches associated with renting for 20 to 30 years are greater than the headaches associated with financing, as that's about what you're looking at before you'll be able to buy a home, unless you make rather more than expected.
The thing I'm recommending that you protested against was having a credit card and paying it off every month. Note that people have pointed out above how this has gained them large sums of money in the short term, without accumulating any long-term debt. I also pointed out that he could save thousands of dollars on the mortgage he will most likely get at some point by taking this course of action.
In response, you said that he should not undertake this course, because he could instead never go into debt and save -- of course, if he ever ends up deciding to get a mortgage, he'd be screwed, and having a credit card that you pay off every month increases your ability to save (as you gain up to an additional month's interest on money you're spending).
They are not mutually exclusive, but being willing to take on debt when it is appropriate can let you have more of those things. Most people value that additional amount more than they value not being in debt (understandably), so they are willing to enter into some debt to obtain it.
Posts: 15770 | Registered: Dec 2001
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quote:Originally posted by erosomniac: although I'd say owning one's home and thereby avoiding the headaches with financing one over 20-30 years can demonstrate a very strong, if different, focus on providing well for oneself and one's family.
What headaches? Every month I go into our online account and transfer the house payment from the checking account to the loan account. It's easier than paying rent ever was (although maybe large rental companies let you pay rent online now).
Posts: 9866 | Registered: Apr 2002
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posted
As a suggestion for those Canadians that may be reading. Canadian mutual funds have MERs that are higher than the States and are some of the highest in the world, even with index funds.
However, a Canadian usually cannot easily purchase US mutual funds. In this case, I would suggest taking a look at ETFs as well as index funds.
Posts: 7593 | Registered: Sep 2006
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posted
I also highly highly recommend getting some Dave Ramsey books. Particularly if you don't know a lot about finances and investments. He puts things in plain terms making it easy to understand.
Personally I wish I had never ever gotten a credit card. Those that use them sparingly and pay them off should be commended but also realize they are the exception and not the norm. One of the things Dave Ramsey suggests is creating an emergency fund of at least $1000 to start. A lot of day to day emergencies (broken water heater, a lot of car repairs etc) can be taken care of with that amount.
It may be tough to find big and tall clothing at a thrift store but it can be done. I love thrift store shopping! You really can find good quality stuff that has been hardly used and sometimes not even used. Its worth a try to solve the clothing situation inexpensively.
Posts: 1132 | Registered: A Long Time Ago!
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posted
On a personal level, all the brokers I've seen (discount or otherwise) in Canada simply do not give the option of buying mutual funds from US companies. You cannot simply open a trading account in the US either.
On a bigger scale, I suspect that the banks and brokerages here are benefiting from that limitation since many of the mutual funds are operated by the big five banks which operate the bigger discount brokers as well, so there is no pressure to change it. I would not be surprised if there is some red tape involved too.
There's a bit of talk on both fees and access to American products herePosts: 7593 | Registered: Sep 2006
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quote:Originally posted by Wendybird: It may be tough to find big and tall clothing at a thrift store but it can be done. I love thrift store shopping! You really can find good quality stuff that has been hardly used and sometimes not even used. Its worth a try to solve the clothing situation inexpensively.
My people don't throw away our clothing. We wear it until it disintegrates.
Posts: 3852 | Registered: Feb 2002
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quote:See, here's the part I don't get about people who have credit cards and pay them off every month. Obviously, you folks have a tremendous amount of financial discipline. You're really good about money.
So why not spend maybe one year saving $50 a month, and have a couple of garage sales where you made $200 per sale.
At the end of the year, you'd have $1000 in savings.
This would serve the same purpouse as the credit card, but with considerable less risk of identity theft, costly bank mistakes, and it would earn you interest instead of running the risk that, even once, you would get charged interest.
Then, from there, keep saving the amount you used to spend to pay off your credit card bill each month, until you have 3-5 months worth of expenses saved.
Can you imagine the peace of mind that would bring you? The joy of knowing that, were you to lose your job right this minute, you would have your expenses taken care of for the next few months while you tried to find a replacement job?
Why is not having a credit card necessary for that. I have more money in my savings because I have a credit card. I have better records of what I spend because I have a credit card. I have emergency savings and credit. I've got that peace of mind. Heck, I had the joy of taking three years off without working or going into debt in order to pursue a lifelong dream because of my financial management - and having credit was an integral (but not the most important part) of that management process.
quote:The first is the risk that, while it can go well month after month after month, it only takes one or two bad months for it to pile up. Once it piles up, it becomes a much larger chunk of your budget. Once it becomes a much larger chunk of your budget, that leaves you less money, and the less money you have, the more likely you will "need" to use the card again.
And those who lack either the self control or the management skills to avoid such bad months should not get a credit card. However, when bad months happen, having a credit card can make the bad month cheaper in several ways:
1) it can allow the emergency fund to be in slightly less liquid form. If you know you can survive for one month without touching the emergency fund, you can put it in higher yield accounts.
2) it can allow meeting a financial crisis as early as possible, avoiding late fees, collection fees, or deterioration of physical assets due to lack of repairs after a catastrophe.
3) it can allow one the confidence to avoid hasty (and often wrong) resolutions to financial emergencies.
quote:The second is that, in most American's minds, Credit has taken over the function that Savings used to have. A credit card takes away people's sense of urgency about needing to save, let alone the actual dollars that they would have saved going to interest.
Which is a problem with how credit is perceived, not an inherent problem with credit itself. Replacing one flawed perception with another is not the solution to that problem.
quote:Making that tiny little course change to make sure some money gets saved every month requires considerably less caution, and gives you considerably more peace of mind as those dollars start to grow.
It still takes discipline. Having $1000 in the bank can provide the same temptemptations as having a $1000 credit limit.
But for people who have the discipline to always pay the card off, this shouldn't be a problem.
While I once used my credit cards as much as the next guy, it's become really, really clear to me how silly it was. I could do the same thing with myself. At the end of my life, I'd have accumulated more interest than I'd spent.
Which indicates that you were not following the advice being given by most people in this thread. Why are you raising your having problems with doing something one way as a reason not to do something another way?
quote:So what about this idea that it's good to carry a balance on the credit card, so that we can either earn rewards, earn "points," or earn interest on the money somewhere else until we use it to pay off the cards?
Who has advocated carrying a balance to earn rewards? You get the rewards even if you pay the card off every month.
I make about $400 from reward programs each year, and about $60 each year based on extra time money is in my interest-bearing checking account.
quote:Just remember that the credit card companies are also taking a risk--they're gambling that, as long as you have the card and keep using it, the day will come that you'll go ahead and let that $100 slide. And then that the $100 will become $200. And so on, until one day you wake up with the $7,500 in credit card debt the average American has, and suddenly a big chunk of your labor every day is going to earn money for a giant credit card company instead of earn money for you.
Sure. And I am perfectly capable of ensuring that doesn't happen or, if it does happen, ensuring that the costs of that decision are better than whatever the alternative is of not doing that.
quote:Peace of mind. Knowing that, if I lost my job this month, my home would be paid for.
But you're going to have a significant period of time when your home is not paid for (that is, the time spent renting instead of owning) in which that risk is even more severe. It's far easier to evict delinquent tenants than to foreclose on a house, and banks have far more incentive to avoid foreclosure than landlords have to avoid evicting tenants.
Posts: 26071 | Registered: Oct 2003
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posted
My mortgage is cheaper then my rent was. I live in a three bedroom home, with a big yard is a safe, family friendly neighborhood. When I rented, I was in a one bedroom apt, tripping over my stuff because it was so, so tiny. So, taking out "debt" to live in my beautiful house has greatly improved my quality of life and my financial situation (currently, I would have to pay 200 bucks a month more for rent then I do for mortgage in the cheapest nearby apt building- and since I have a baby, legally I couldn't get that apt anymore, I would need a 2 bedroom). So, how is going into debt for my house at all a negative?
Posts: 1001 | Registered: Mar 2006
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Also, none of what you're saying changes the fact that debt is risky.
The question everyone has to ask themselves is where they want to take their risks.
I have a friend who carries a balance on his credit card, but never pays interest. He constantly finds new cards he can transfer the balance to at 0% interest. In theory, if he could do this with, say, $5,000, he could put that $5,000 in a high-yeild CD or money market account and be making money off it as he continues to float the balance between cards. After a couple of years, he could take the money out of the CD, pay off the last card, and keep all the interest. Or keep floating the $5,000 between cards as he only withdraws the interest.
He would be ahead of the game. He would be making money. It would all be working out great for him.
But it would also be risky, for a variety of reasons. The question is whether the money he's getting out of the deal is worth the risk.
Plus, there's the "Opportunity Cost." What could he have done with the time he was spending looking for the new credit card? Could he have found a good growth stock mutual fund that could have earned him even more than his plan is earning him?
Sure, there are advantages to investing using OPM (And any type of leveraging for profit is investing using OPM, whether it's pants on a credit card so I can keep my job, or if it's borrowing money so I can buy a rental property, or money from an "Angel" investor to buy a start-up, or using your credit card to pay bills while your savings or money market accounts earn interest).
However, there are also risks. And everybody has to weigh their degree of comfort with those risks for themselves.
With credit cards, the risk is that you have this place, just sitting there, where you could take on huge debt at any moment, out of either poor judgement, bad luck, or whatever.
And for someone trying to make ends meet, this is far likelier to happen than for somebody who has gotten established and comfortable (which is what I think was meant by the "different universe" comment. A college student is far less likely to be benifiting from interest earned in a money market account.
In fact--and I know you'd think is really bad advice, but if he was going to be carrying a balance on his card each month (which he said he would), I would tell him to stop investing in any type of IRA or 401k or 403b until it was paid off. The intrest on this card (12.24% to 23.24%) would be more than what he'd be likely to be earning in his 401k or 403b (10-14% would be good), and it would not make sense to earn that lower interest vs. pay the higher interest on his credit card.
The thing about credit cards is, the less likely you are to need them, the more the risk of having them goes down. So sure, somebody financially solvent enough to not be living month-to-month can say their credit card doesn't involve much risk for them or hurt their portfolio much.
But a young person thinking, "Things are really tight for me every month. I need to figure out how to get access to credit in case of emergencies," will be in a very different place in 10 years than a young person who's thinking, "Things are really tight for me every month. I need to figure out how to get some money stashed away in case of emergencies."
When they both get to the point where their income has gone up, one will have already learned about CDs, money markets, mutual funds, stocks, bonds, etc, and can go straight to work. The other will have to work on paying off all that debt, and then still have to learn how to do all that investing and saving at an age where they can't afford to take as many risks or "learn the hard way."
And the risks of investing are risks I'd rather take than the risks of carrying a bunch of credit cards.
Not that I'm taking those risks yet. I'm still paying off the debt from those cards I just had "for emergencies."
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As for home ownership, and how to do it without taking on debt--
The only options here are not just either "Get a home" or "Rent until you've saved up enough to buy a home."
There are a ton of gradiations in between.
I have too many friends who were told all the benifits of home ownership and ended up in bad loans, because that, as a rule, home ownership was better than renting. Many of them are now upside down in loans that are for more than their house is now worth, with balloon payments still pending.
What other options are there, if you want a paid-for home?
Plan 1: You start out buying the smallest thing you can afford, and pay it off as fast as you can. Then you save until you can afford more, and you upgrade. Then you save until you can afford more and then you upgrade.
In this plan, you're still making a "house payment," but the house payment will be into a savings account earning interest instead of into a mortgage, paying interest.
In the long term, this will leave you with more money in your pocket than if you had been paying interest those same years. In fact, the interest you earn will be going towards improving the quality of the home you end up in when all is said and done, rather than creating a gap between what you've paid for the home and what it's actually worth (by the time you're done paying a 30 year loan on a home, you've often paid more than double the value of the home).
Plan 2: You buy "Property" instead of a home, and a trailer to go on it. You live in the trailer (Or manufactured housing) while you build your home using cash (this was edited. I originally had said "equity," but that's not what I meant).
Again, the same money that would have gone to paying a mortgage is now going to building a house that is exactly how you want it. It takes years, but the price of those years of living in a trailer is that you are now living in your dream home, and you own it, free and clear.
A friend of my wife's went this route, and they don't regret it in the least. They went a while living like the poorest folks in town (in a trailer), but they now live in one of the best homes in town. And unlike the people living in the other houses, they actually own their house, not the bank.
So anyway, there are other options than just renting or buying.
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I'll just say that this post sums up my feelings about carrying credit cards--even if you pay off the balance--just for the rewards. It's something that works for some people. The liklihood of it working for you is related to how likely you are to actually need the benifits of what you're getting out of it.
A lower-middle class person struggling from paycheck to paycheck is more likely to run into problems with this system than somebody who has a healthy savings account and regular investments.
If you're financially stable, and you want to want to use credit cards as a way to generate additional income, power to you. It still doesn't make sense to me, what with all the ways of generating income there are out there, but power to you.
I'd still be very reserved about recommending it as a strategy to folks who don't already have savings. Just because a snake handler knows how to pick up a snake without getting bit, doesn't mean he should go around suggesting people get them without issuing a ton of caveats.
Which, of course, all of you did.
I think what's got everybody's dander up was me saying that keeping credit cards around even if you pay them off every month is a bad idea.
Those of you who do that are probably used to hearing that, and react defensively when it's criticized, because you think it's a personal attack on you.
I don't really intend it as anything of the sort. If you can do it, power to you. We all chose where we take our risks in life. That's one you take, and it's working for you.
I am not joking when I say I intend to someday hang glide without a helmet. I want to experience flight without a bucket on my head. Lots of you probably think that's stupid, but it's a risk I'm willing to take in exchange for what I believe I will get out of it.
You probably think that's a risk that doesn't make any sense to you.
Similarly, the risks of keeping credit cards and paying off the balance in full every month are risks that don't make sense to me.
Either you're financially insecure, in which case the credit cards could lead you further down a dangerous road, or you're financially stable, in which case you feel like you've got asbestos gloves on, and so you feel like you can handle the hot coals with impunity. Power to you.
Personally, I would still rather put that same effort into things that will generate interest and income through other means instead of that one.
And the fact is, you're a statistical anomolly. Average american with a credit card does carry a balance on it. And so advocating getting a credit card and paying it off every month as a viable and reliable financial tool is like advocating keeping a the gun within reach of children in case you ever need them to bring it to you when you've been shot in the leg by a home intruder. Sure, there are ways to do it safely, but without a lot of caveats, it's still really, really bad advice.
posted
Oh, and incidentally, I am not universally opposed to debt, as some in this thread are. I have a car loan, and I will probably be forced to go into debt to buy my first home.
However, I will say that I would not have had to go into debt to buy a home if a while back Americans hadn't decided to go insane about the amount of debt they were willing to take on, and the types of loan products they were willing to twist themselves into in order to get one.
In other words, it's silly to say that just because home prices have been stretched into the stratosphere by people willing to take on massive amounts of debt, that therefore home debt is an inherently good idea (Ten million smokers can't be wrong!). Just because they've set the standard for what you have to do to afford a home, doesn't mean it suddenly becomes wise.
At best, it just makes debt for home ownership a sometimes neccessary evil.
Posts: 1894 | Registered: Aug 2000
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quote:And the fact is, you're a statistical anomolly. Average american with a credit card does carry a balance on it.
And this is why my standard advice on credit cards is to avoid them. They can be used wisely, but usually they are not.
Posts: 3275 | Registered: May 2007
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23.8% of American households have no credit cards.
31.2% of American households have a credit card and pay it off every month.
So 45% of American households have a credit card and don't pay it off every month, but among those . . .
The median amount owed is around $2000. Only 29% of American households owe $1000 or more.
So, out of all American households, 47.2% owe $1000 or less, and 23.8% don't even have a card. So the number of households with a low or zero balance on a card is much greater than the number with a higher balance (and even then, few have balances anywhere near the commonly reported average; only one in 20 is at or over that number), which is only 29% of households. There's no easy way to break that down by people without knowing the distribution of numbers of people in households.
Furthermore, these numbers have been generally improving. The housing situation will probably put a brief stop to that, of course.
And as we've seen, there are at least numerous people on hatrack who pay their cards off every month, without any particular effort. And those people who are capable of doing so are able to better themselves significantly.
Perhaps it might be more analogous to driving. Heck, driving is even more dangerous, since personal capability cannot reduce some of the greatest risks, and the average American has probably been in some sort of wreck. Plus there's the whole physical damage part. Yet you might notice most people drive, because not driving is worse.
Posts: 15770 | Registered: Dec 2001
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posted
Home loans were generally necessary before prices were sent into the stratosphere. Don't fall prey to the "good ol' days" fallacy.
Posts: 15770 | Registered: Dec 2001
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quote:Originally posted by docmagik: So anyway, there are other options than just renting or buying
Both your "plan 1" and "plan 2" are buying. No one said that buying a giagantic dream house with as much money as you can possibly borrow and that you can't afford to make the payments on was a good idea. But buying a house with a fixed rate mortgage whose monthly payment is less than you otherwise would be paying in rent is a very responsible thing to do, unless you plan to move so soon that the selling and closing costs would eat up more than you'd save in rent.
Posts: 9866 | Registered: Apr 2002
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quote:Plan 1: You start out buying the smallest thing you can afford, and pay it off as fast as you can. Then you save until you can afford more, and you upgrade. Then you save until you can afford more and then you upgrade.
In this plan, you're still making a "house payment," but the house payment will be into a savings account earning interest instead of into a mortgage, paying interest.
In the long term, this will leave you with more money in your pocket than if you had been paying interest those same years. In fact, the interest you earn will be going towards improving the quality of the home you end up in when all is said and done, rather than creating a gap between what you've paid for the home and what it's actually worth (by the time you're done paying a 30 year loan on a home, you've often paid more than double the value of the home).
This is demonstrably false in most housing markets (i.e., with housing prices rising at or just above inflation). For one, your conclusion does not take into account the fact that appreciation is on the entire value of the house, while interest is paid only on the outstanding balance. While someone is saving enough to pay cash for a starter home, someone else will be a achieving that appreciation.
Moreover, your starter home/upgrade idea is fully compatible with having a mortgage. Someone who follows that plan except for starting out 10 years earlier because they took out an 80% loan on their house will be significantly better off financially for having done so. Moreover, the downside risks are essentially the same. If, during the 10 years before paying off the mortgage, the homeowner loses his job, he risks having to sell the house to pay off the mortgage. Worst case is foreclosure which, with 20% down, will at most be risking the house, and, most likely, will still recover a significant amount of equity. The person who is saving but renting during those years is risking his savings in precisely the same way - he will need to use those savings to pay rent.
Even in other types of markets, your conclusion that plan 1 will leave you with more money in the long run is not always true - there are few situations where, over the long run, your conclusion is true.
Sure, people who overextend themselves by a bigger house than they can afford will suffer greater losses. But that's not inherent in mortgages themselves.
There isn't a plan that allows a person with no current savings to buy a home without credit that I can't modify to make both less risky and have a higher expected return by introducing proper use of credit.
quote:I think what's got everybody's dander up was me saying that keeping credit cards around even if you pay them off every month is a bad idea.
Those of you who do that are probably used to hearing that, and react defensively when it's criticized, because you think it's a personal attack on you.
Any dander that's been gotten up has more to do with not wanting someone to take bad advice.
quote:Personally, I would still rather put that same effort into things that will generate interest and income through other means instead of that one.
And it's this repeated insistence that many of the positive things you are advocating are somehow precluded by using credit wisely that is at the heart of the flaw in your advice.
quote:And the fact is, you're a statistical anomolly. Average american with a credit card does carry a balance on it. And so advocating getting a credit card and paying it off every month as a viable and reliable financial tool is like advocating keeping a the gun within reach of children in case you ever need them to bring it to you when you've been shot in the leg by a home intruder. Sure, there are ways to do it safely, but without a lot of caveats, it's still really, really bad advice.
What caveats haven't been given that are needed?
quote:However, I will say that I would not have had to go into debt to buy a home if a while back Americans hadn't decided to go insane about the amount of debt they were willing to take on, and the types of loan products they were willing to twist themselves into in order to get one.
In other words, it's silly to say that just because home prices have been stretched into the stratosphere by people willing to take on massive amounts of debt, that therefore home debt is an inherently good idea (Ten million smokers can't be wrong!). Just because they've set the standard for what you have to do to afford a home, doesn't mean it suddenly becomes wise.
When I bought my first house, I needed a loan to get it. It is mathematically certain that I did better financially by doing so than I would have done had I waited the 10 years it would have taken me to save up that much. And even at inflation-only escalation, I would have been 30% short of the mark after saving the price I paid.
I was certainly saving faster than the average person is capable of - I was single, had a roommate for a portion of that time, had a very good job, and fairly simple tastes.
Posts: 26071 | Registered: Oct 2003
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posted
I have a credit card. I use it instead of carrying cash. It's also good for making internet purchases, and I prefer it to a debit card because of the fraud protection. I don't consider it as debt because I pay it off every month.
In some ways, it's a better check on my spending because the amounts are there on my statement.
Posts: 3546 | Registered: Jul 2002
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posted
Another point regarding improving credit rating that I don't think has been brought up is that some companies use them in the hiring process. Whether that is right or wrong, it is done. So, it is well worth the effort to improve that number. Having a credit card improves that number.
Posts: 1001 | Registered: Mar 2006
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posted
It means that the thread starter is putting Hatrack on notice that he may delete this thread at any time.
Posts: 26071 | Registered: Oct 2003
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posted
Huh. I'm sure there are myriad reasons, but why would Javert delete this thread? Just confused.
Posts: 1286 | Registered: Dec 2005
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Abhi and I have several credit cards, and have since we started college four or five years ago. We use them like others in this thread and pay them off every month - they give decent rewards and money-back points and are a convenience, not a source of debt. Basically, I agree with pretty much everything fugu has said in this thread (as I do in most money/economics-based threads ).
Credit cards have significantly helped improve our standard of living through their ability to smooth consumption. For instance, we recently moved into a new apartment on the other side of the country from our families. We got a card with 0% APR for 6 months, and used it to furnish the place with IKEA stuff (since we couldn't get any hand-me-downs from family). Paid it off in a couple of months - months where we've been enjoying having a nice couch to sit on at the end of the day. Sure, we could have saved for a couple of months to get all this furniture, but this way was more time-efficient (one big trip to IKEA rather than several as the money became available), and ended up costing us exactly the same amount.
We also just bought a car, and, since we have good credit scores developed from credit cards alone (I found out mine is 765!!), we could finance it lower. We're planning on paying off the car in 12 months - once we've developed a credit history of having and paying off installment debt.
A book I highly recommend to other young people is Suze Orman's The Money Book for the Young, Fabulous, & Broke. While a bit cutesy at times, she hits ALL of the major money concerns young people have (or should have). There's chapters about credit scores, credit cards, student debt, savings, retirement, investing, buying a car, a home, etc. Abhi and I have moved on to her Smart Couples Finish Rich, but this first book was a very useful find during college.
Posts: 2409 | Registered: Sep 2003
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posted
I say keep this topic. It's rather useful. I need to learn more about credit and improving mine, even though I won't have a house for ages and if I ever learn to drive, I'll just get a cheap hoopty intstead of buying a new car. I can think of one reason to rack up good credit, but what I really want is to owe NOTHING. To figure out how I can get rid of all my student loans, my credit card debt, everything. Short of winning the lottery and since I don't have overtime yet, I have no idea how I'll do that short of getting 3 jobs.
Posts: 9942 | Registered: Mar 2003
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quote:Originally posted by dkw: What headaches? Every month I go into our online account and transfer the house payment from the checking account to the loan account. It's easier than paying rent ever was (although maybe large rental companies let you pay rent online now).
Pfft. Who needs the rental company to allow it? I use online billpay from my bank. Then rent gets sent out automagically to my landlord every month, without me doing a single thing. (Other than keeping enough money in the account.)
Posts: 32919 | Registered: Mar 2003
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quote:I'm also not sure how the pursuit of this goal infringes on hobbies, an education, travel, etc.
Paying in cash for a house could infringe upon those hobbies by leaving you less money overall to use to pursue them.
For example, if you pay $100,000 in cash for a house, you lose your ability to use that $100,000. It is gone from your pockets. Your net worth at the end would be $100,000 - all tied up in your house.
But if you take out a loan of $100,000 which you don't have to pay for a year, that would mean you can invest the $100,000. If you put it in the stock market, it could earn 10% that year - meaning you earn $10,000. If your interest rate on the loan was only 5%, the loan would only cost you $5,000. That means your net worth after a year from this scheme is $105,000... a $5,000 profit that can be used on your hobbies!
This is one benefit of loans: They allow you to invest your money during the timespan of the loan, and if those investments can earn a higher rate than the interest rate of the loan, it could potentially mean a profit for you. (Then again, if the stock market tanks during that time, it could also mean a loss!)
Posts: 8120 | Registered: Jul 2000
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quote: Who has advocated carrying a balance to earn rewards? You get the rewards even if you pay the card off every month.
I make about $400 from reward programs each year, and about $60 each year based on extra time money is in my interest-bearing checking account.
I'm getting my first credit card in the mail within the next two days, and as someone who would never be silly enough to leave a balance, I was intrigued by the possibility of getting extra interest.
But it's not that much.
So, Dag, what bank do you have your checking account with and how much do you charge a month?
Because I thought I was doing well with money market account that my bank has that has a hefty min balance, but it was an aggregate balance, so I have that entire minimum in 5% CDs. The rest of the money I have in the actual MM account which gets a whopping 1.25%
Say you charge 500 a month and your account makes 1.25%, because you transfer the money over to your checking (which gets 0.5%, how nice). Now that's more than what I spend on average.
Assuming you gain a whole month's interest, that's about 50 cents a month. After the cost of the stamp (though my account has snazzy online bill pay for free) you've got yourself a dime left. I usually find a dime on the ground every month.
The difference between compounding and not compounding the interest over a year is less than four cents.
So theoretically I could just pack some sandwiches when I hop a plane in October and I've made back the money I've saved by using my new credit card.
But since you have the receipts and all, you probably do get $60 a month and probably spend more because you have more bills than I do. As a college student, food and shelter are already paid for, so most of my purchases go quite firmly in the "wants" category.
So where do you all find these banks that give away so much interest for savers like me?
Posts: 1757 | Registered: Oct 2004
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I will say that I have an excellent credit union (Navy Federal). The Money Market account pays 3.54 to 4.94% right now (all the money we're talking about gains the highest marginal rate for my balance, which I'm not going to put on the Internet), and this was higher a year ago. Judicious money management lets me keep the money in as long as possible.
There have been some months where the most I spend in cash is $20 - with everything else that's not a mailed-in bill going on the credit card.
As docmagick said, the tiny effects can have a big difference over time.
If only I could put that into practice with diet. :/
quote:Paying in cash for a house could infringe upon those hobbies by leaving you less money overall to use to pursue them.
For example, if you pay $100,000 in cash for a house, you lose your ability to use that $100,000. It is gone from your pockets. Your net worth at the end would be $100,000 - all tied up in your house.
But if you take out a loan of $100,000 which you don't have to pay for a year, that would mean you can invest the $100,000. If you put it in the stock market, it could earn 10% that year - meaning you earn $10,000. If your interest rate on the loan was only 5%, the loan would only cost you $5,000. That means your net worth after a year from this scheme is $105,000... a $5,000 profit that can be used on your hobbies!
This is one benefit of loans: They allow you to invest your money during the timespan of the loan, and if those investments can earn a higher rate than the interest rate of the loan, it could potentially mean a profit for you. (Then again, if the stock market tanks during that time, it could also mean a loss!)
The last sentence is key - you need to compare risk. Paying off principal on a loan is a low-risk investment at the rate of the loan (adjusted for tax deductions, of course), essentially taking it from a negative gain to zero.
Low-risk investments earn less than higher-risk investments. Especially over a short-term such as a year, maintaining a loan balance needs to be compared to something that is low risk, such as gov't treasuries with a year term or FDIC-insured deposits.
The flip side is liquidity - the money "invested" by reducing loan principal is much less liquid, especially at times it might be needed (because of the need to refinance). That needs to enter the calculation as well.
My preference is to pay down mortgages as fast as possible, but not at the expense of maintaining a savings cushion (a cushion that needs to be bigger until the mortgage is paid off). However, I always make sure to calculate what that is actually costing me before making that decision - that way I am deciding based on complete information.
Posts: 26071 | Registered: Oct 2003
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posted
I want to say to anyone reading who is looking for information because you don't feel you have all the answers yet, that you should be able to see in this thread that different people feel differently about the same situations.
A lot of that comes down to two things:
1. Their level of comfort with risk
2. What their primary goals are.
To somebody who has it as a goal to own their home free and clear, both for the peace of mind it will bring as well as the freedom from being beholden to another man, keeping a mortgage longer than is neccessary can seem silly. Such a person wouldn't even get more than maybe a 15 year fixed loan, let alone 40 year loans with weird adjustable APRs and balloon payments.
To somebody who wants to make as much money as they can, as fast as possible, paying off a loan with a small interest rate can seem silly, when you could be earning double (or more!) what you're paying with that same money.
For me, there was a night, when I was in the middle of my credit woes, when my daughter was sick. At the time, my co-pay for an emergency room visit was $50. I didn't have it. I had no idea where I was going to get it from.
And since it was using credit cards that had gotten me into that fix, I realized that while I had thought the credit cards were bringing me security, they weren't. They were adding to my problem.
What I wanted, end of story, period, the last word, was peace of mind. I didn't want to have one more sleepless night, crying and wondering how to take care of a child who I had brought into the world.
I wanted secrity. And while I thought credit cards had been bringing me that, as I racked up my problems as debt against some "future" income, I realized it hadn't brought me that at all.
The only thing that could do that for me was savings.
And then my priority paying off the credit card debt as fast as possible, so that money could go towards building up more security, instead of making some guy at Visa rich.
Dag and fugu and everybody else are exactly right when they say this isn't neccessarily the fastest way to make money. "Leveraging" your money to make more money is a very real, viable option. It isn't the fastest way into a big home.
However, you just have to decide what things you are and aren't willing to risk in the the name of leveraging.
For me, I'm not going to do it with Credit Cards. And I'm certainly not going to do it with my home.
I'm trying to change the minds of people who want to use their credit cards for monthly security.
Dag and fugu and the rest are trying to change the minds of people who don't see responsible use of credit as being worth the risks for the benifits you can get.
The only factor that can decide which of us to listen to--or what combination of all our points to listen to--is what you value.
For me, the peace of mind of knowing that Visa has nothing on me, ever, is worth more than $60 in interest and $400 in gift certificates.
The peace of mind of knowing that I own my home, free and clear, will be worth more than the extra 6% I could have made off that money if I had left a 30 year mortgage and invested that money.
So everything we're all saying is valid.
(Except where they say that it's somehow impossible to get to owning a better home through earning interest on money instead of paying interest on mortgages. That's just silly. And even sillier is the part where they say the plans I outline are somehow impossible, even though I know people who've done both.
Again, their plan will get you into a big home faster. Their plan might give you more money. The risk is that if anything goes wrong, you still have to figure out where to get money to pay your mortgage.
My plan will get you the security of owning your own home faster. My plan might leave you with a better home at the end, even though you will spend a while living in houses that aren't as nice as your friends who are willing to take on the debt and keep it. However, you will more quickly get into a position where, if there are problems, keeping your house will not be added to your list of worries.
So the only thing that would make either one of these plans "bad advice" is what your values are.
For me, I just want to be done with any type of financial risk that involves debt. If I lost my job this month, I want to be able to have my only worry be how to find another job--not how to keep the lights on and the house paid for.
If I just wanted to quit my job this month, I want to be able to do it without having to worry about losing my house or keeping the lights on.
And besides being debt-free and having money saved, every other solution for how to get that involves some degree of risk, and that's risk I'm not willing to take any more.
I'll take risks in the name of making money. I'll still take measured risks in investing the same way anybody else would--the greater the opportunity for return, the greater the risk I'll accept--but this is only after my month-to-month peace of mind is assured.
Dag, seriously, like I said in this thread already, I respect that other people are willing to take risks I'm not. I respect that other people have different goals than me.
My post about paying off credit cards every month wasn't directed at people who have money sacked away and like to "play" with credit cards to get gift certificates. It was directed at people who live month-to-month, have credit cards and pay them off every month, and who didn't have the type of $1000 savings account I described. Obviously, if you've got $1000 in savings that post doesn't apply to you.
But please, don't call what I'm suggesting "Bad Avice."
I don't see this thread as being directed at people who have a bunch of money already saved and who are just going to use their credit cards to play with. That isn't who started the thread, and that isn't who is going to come here looking to learn about credit cards and mutual funds.
It's directed at people who are on that boundry line where they're having trouble keeping their expenses inside of their income. Telling them to avoid using credit and to save money and to live within their means is hardly bad advice.
Telling them about the security that can come from owning their own home is hardly bad advice.
Just like telling them about the money that can be made from leaving a mortgage on their home is hardly bad advice.
Then they can decide which they value more and follow that course. Or decide what balance of the two they want more, and follow that course.
But seriously, my point is that security is not to be found in debt. That's hardly untrue or bad advice.
Your point (and fugu's) is that the risk of debt can be managed. That's also true.
You'd rather give up some security in the name of money--I'd rather give up some money in the name of security.
Everybody's argument with me seems to be, "You can have both." Of course you can have both. Everybody's got some degree of both. But you always have to give up a little bit of one to get more of the other.
What I'm trying to do is this: Help people who are just "becoming an adult), that a few years later (I'm 32), that debt that seemed so easy and manageable when they were young, that you dreamed would be so easy to pay off once you got out into the world and made some "real" money, that it never becomes easy. They become chains that hold you down. They mean that every hour you put in at work, a big chunk of that labor is going to somebody else.
quote:“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. . . . Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” — J. Reuben Clark
That's all I'm trying to do--warn people about the risks of debt. It holds an enticing allure for young people, in its promise that they can have things today because of their hope for the future.
But ultimately, you could be sacrificing your future in the name of your present. Instead, sacrifice your present for the sake of your future.
Save money.
Thems that understand interest, earns it. Thems that don't, pays it.
The people advocating use of credit cards in this thread are doing so because it's going to make them money, not because it's going to get them something today they can pay for tommorrow.
Personally, I think there are better ways to make money and spend my time than bouncing my money from account to account to account to pay my bills, but the principle is still correct. You need to look for ways to stash money, and then let it work for you instead of ways to be the place where other people are stashing their money.
The first part of that quote feels very different--and more hopeful!--if you're the one earning the interest:
quote:Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours . . .
Doesn't that sound nice?
Yeah. That's what I'm talking about.
I know it's not easy. I do. I have had every financial problem from cars breaking down to car accidents to theft to vandalism to surgeries to tumors. I had to drop out of school for a while so I could afford to pay medical bills for pregnancies.
And I'm not there yet. I still worry about what would happen if I lost my job.
But I don't worry about where to get the co-pay or the medicine for my sick daughter. And if my car broke down today, I could still get to work. And if I . . .
Security. Peace of mind. That's what I'm chasing.
And I just don't see credit cards as being any part of that equation. Even when I'm doing well enough not to need them any more.
-----------------------------------
I'd like to recommend some books really quick. Some may have been reccommended already.
The Automatic Millionare (Guide to investing without having to give it thought)
The Millionaire Next Door (Better Living Through Living Within Your Means)
Rich Dad, Poor Dad (Why isn't your home an asset? A different way of figuring your balance sheet)
More Than Enough (The problems with Debt and a primer on investing)
Total Money Makeover (A guide for people already burdened with debt for how to start saving, get out of debt, and start building wealth)
The Art Of Playing Real-Life Monopoly (A very basic introduction to stocks, bonds, real estate, and other forms of investing)
Anybody else have any good book suggestions?
Posts: 1894 | Registered: Aug 2000
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posted
Your posts are bad advice to anyone who has the self-control to not spend money they don't have without weighing the outcome first.
Posts: 15770 | Registered: Dec 2001
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quote:Your posts are bad advice to anyone who has the self-control to not spend money they don't have without weighing the outcome first.
The people who lack self-control are not aware of that shortcoming, or do not appreciate the magnitude of their poor decisions, until it's "too late."
The benefits from credit cards are generally incremental (miles, bonuses), while the potential downfalls are significantly larger.
Mortgages are less of a concern for me. If you get a mortgage that's not beyond your means it's not very scary. I make a very good income right now, but even if I lost my job and had to work at McDonalds, I could still pay my mortgage.
Posts: 3275 | Registered: May 2007
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posted
I think you will find that many of those people are aware of that shortcoming -- notice those who have posted such in this thread. Furthermore, I am a firm believer in the notion that financial responsibility can, in almost all cases, be taught. I think very few people are inherently unable to manage money, if any.
I think I have provided evidence that huge numbers of people, arguably most in the US, are currently keeping their credit card expenditures manageable. I think that those who aren't could probably be mostly educated to do so, and that their state is in part due to the dismal state of education (by families and by schools) about financial responsibility in the US. I think teaching people to use debt effectively will be a much greater tool for their wellbeing than teaching them to avoid debt like the plague.
Posts: 15770 | Registered: Dec 2001
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quote:Dag and fugu and everybody else are exactly right when they say this isn't neccessarily the fastest way to make money. "Leveraging" your money to make more money is a very real, viable option. It isn't the fastest way into a big home.
However, you just have to decide what things you are and aren't willing to risk in the the name of leveraging.
What we are suggesting isn't risking anything that isn't also risked by what you are suggesting. The only way you have addressed this is by continually comparing your preferred method with methods that neither fugu nor I have recommended.
quote:Dag and fugu and the rest are trying to change the minds of people who don't see responsible use of credit as being worth the risks for the benifits you can get.
The only factor that can decide which of us to listen to--or what combination of all our points to listen to--is what you value.
For me, the peace of mind of knowing that Visa has nothing on me, ever, is worth more than $60 in interest and $400 in gift certificates.
Perfect example. NOTHING I have suggested makes Visa have something on me, because nothing gets charged to the card that I don't already have the cash to pay for.
Despite your continual use of the word "risk," you've failed to identify any risk that exists based on my* methods that does not also exist in yours.
quote:It's directed at people who are on that boundry line where they're having trouble keeping their expenses inside of their income. Telling them to avoid using credit and to save money and to live within their means is hardly bad advice.
This thread is directed at a young person who has asked whether he should get a credit card and why, and all the advice given by me concerning that question is just as applicable to him as it is to me.
quote:Your point (and fugu's) is that the risk of debt can be managed. That's also true.
No, my point is that the risks of using credit in the way I have suggested are risks that still exist in what you have suggested, just in a different form.
quote:You'd rather give up some security in the name of money--I'd rather give up some money in the name of security.
This is such a twisted version of what I've been saying as to be almost the opposite.
My methods give more security and more money.
quote:Everybody's argument with me seems to be, "You can have both." Of course you can have both. Everybody's got some degree of both. But you always have to give up a little bit of one to get more of the other.
No, everyone's argument with you is that you compare perfect use of non-credit to bad use of credit, rather than the proposed use of credit.
quote:What I'm trying to do is this: Help people who are just "becoming an adult), that a few years later (I'm 32), that debt that seemed so easy and manageable when they were young, that you dreamed would be so easy to pay off once you got out into the world and made some "real" money, that it never becomes easy. They become chains that hold you down. They mean that every hour you put in at work, a big chunk of that labor is going to somebody else.
And it's your pretense that we are somehow advocating the opposite that people are annoyed with.
quote:That's all I'm trying to do--warn people about the risks of debt. It holds an enticing allure for young people, in its promise that they can have things today because of their hope for the future.
No, you are also giving advice which, if followed, can make it more difficult to achieve greater financial security without reducing the risk at all.
quote:Personally, I think there are better ways to make money and spend my time than bouncing my money from account to account to account to pay my bills, but the principle is still correct.
The time spent doing that is almost nil - if I managed my finances well but didn't do it, I'd spend maybe three minutes less each month on them (the time it takes to do two online transfers, which are always done in the course of an online session that I would be doing anyway). That transfer also helps me to keep my finances straight - it has use beyond the $60. And, if I didn't do them, the $400 would be the same and the $60 would be about $20.
quote:But ultimately, you could be sacrificing your future in the name of your present. Instead, sacrifice your present for the sake of your future.
Save money.
Thems that understand interest, earns it. Thems that don't, pays it.
Do you not see that what I have recommended also makes this suggestion? You have yet to identify how this portion of your advice is incompatible with what I have said.
quote:I know it's not easy. I do. I have had every financial problem from cars breaking down to car accidents to theft to vandalism to surgeries to tumors. I had to drop out of school for a while so I could afford to pay medical bills for pregnancies.
And I'm not there yet. I still worry about what would happen if I lost my job.
But I don't worry about where to get the co-pay or the medicine for my sick daughter. And if my car broke down today, I could still get to work. And if I . . .
Security. Peace of mind. That's what I'm chasing.
And I just don't see credit cards as being any part of that equation. Even when I'm doing well enough not to need them any more.
And I've given demonstrable evidence where that can be useful. A very good v. good credit score can save .6% on interest a year on a 30 year mortgage. That's a savings of $80 a month on a 30 year mortgage for a house at the national median price and a 20% down payment. For a home half the median value, the savings is $40 a month.
Having a credit card that is payed off each month and which never has more than a third the available balance charged can easily raise the credit score of a person with little credit history by 100 points.
You have repeatedly compared someone following your advice (by not getting a credit card at all) with someone not following the advice I have a given (by using the credit card in a way I do not recommend) as a way to attempt to demonstrate a flaw in my advice. Perhaps you lack the self control to have credit cards - a possibility I said needed to be taken into account in my very first post. That's not a reason to tell people who use them that they are trading security for wealth.
But for people with that self-control, my advice provides every benefit that your advice provides PLUS additional benefits.
*"My" is used to identify what I have proposed in this thread, not to say I developed this on my own. It's the composite of lots of different people's ideas on this.
quote:The people who lack self-control are not aware of that shortcoming, or do not appreciate the magnitude of their poor decisions, until it's "too late."
If someone is like that, then they are likely to get instant credit from department stores for a 10% discount used on something they can't afford.
Posts: 26071 | Registered: Oct 2003
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quote:Originally posted by Javert: The question is, can you build good credit without paying the card completely off every month? I don't mean missing payments, or paying late, or even paying the minimum. Just not paying it completely.
Yes you can build good credit so long as you are paying at least the minimum required payment each month, the thing to avoid however, is going over the half way point of your credit limit! Say you have a $500.00 limit on a credit card; if you charge $249.99 or even $250.00 on it you are fine, but what most people don't know is that the second you charge $250.01 on it, your credit score gets a ding and you lose points. Every time you purchase something over that amount, you get another ding to your credit score. So a person with a $500.00 limit who has a balance of $275.00 has worse credit than a person with a $10,000.00 limit with a balance of $4,729.00 even though that person has a higher balance on their card! Posts: 15082 | Registered: Jul 2001
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Interesting. My grandfather (who died in '88) was in the US Navy back in the 40s. He was on the Tennessee during the Pearl Harbor attacks.
Posts: 1757 | Registered: Oct 2004
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posted
If you have a credit card just to cash in on the rewards, enjoy it while it lasts. I remember reading an article a couple months back on CNN Money, and a couple weeks ago in the I think TIME or elsewhere that credit card companies across the board are thinking of adding a lot of fees onto everyone's credit card bills, specifically because too many people have credit cards, pay them off every month and still reap the rewards. They want a larger piece of the pie, and that could come in the way of annual fees or transaction fees or whatever they want.
I haven't seen much talk about it other than a random article here and there, so there may not be anything to it at all. But the logic seems to be there. Anyway, just keep your eyes open.
Posts: 21898 | Registered: Nov 2004
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posted
First, Dag, fugu has advocated the use of debt as leverage. Read his first post in this thread. He’s an advocate of the idea that carrying debt isn’t bad as long as you value the thing you’re in debt for enough. So I wasn’t just spinning that stuff out of whole cloth.
Second, I said a long time ago that I understood your point. You’re advocating having a credit card, but treating it like a glorified debit card. In other words, to never, ever treat it as a credit card. Anything I said involving anything beyond that has been more in the interest of trying to clarify my points and show how I was right than to try to say that you were wrong.
If you have to keep telling me how what I’m saying doesn’t apply to you, then maybe in that part I wasn’t arguing with you.
For example, when you say that you can have a Visa card without Visa having any thing over you, it’s obvious that our definitions of “having anything over us” is just different. I mean, we could get into an argument over whose definition of the term is better, but ultimately, that would mean trying to change each other’s values, and do we really think we’re going to do that in a Hatrack thread?
My attempts to show why the $400 in gift certificates aren’t worth it to me aren’t my attempts to show that $400 in gift certificates are worthless to you. That would be like trying to prove that koalas don’t like shoots and leaves by having somebody try them and saying, “See? Aren’t they nasty? How could a koala eat that?”
You’re getting what you want. Great. I understand. Is this still about me saying I didn’t get it? Fine. I get it.
I’m not trying to “prove you wrong.” I’m just trying to get you to see where I’m coming from.
While you feel like you can’t get me to understand that there’s nothing in what I want that I can’t have along with a credit card, what I want you to get is that there isn’t anything inherent in having a credit card that can’t either be obtained another way or that a rational person might not value as much as you do.
In other words, that blanketly telling people “Get a credit card,” without knowing their situation or priorities can be as bad of advice as you consider blanketly telling people not to get a credit card to be.
But even if Fugu and I can’t agree on this, can you and I at least agree that if somebody does have a credit card, they need to never, ever actually use the credit feature, something like what Rivka suggests? Can we at least find that common ground?
quote:Your posts are bad advice to anyone who has the self-control to not spend money they don't have without weighing the outcome first.
The contempt you have for people with debt problems frustrates me. I would say it "offended" me if I was the kind of person who believes in that, but I'm not.
Do you really think people just get into debt out of a lack of willpower?
I mentioned that I want to get into the business of helping the lower middle class learn about debt management and investing. Let me tell you what I do for a living now.
I work for a payday loan company.
Yup. That's right. The bottom-feeders of the credit world. The most vilified lenders on the planet right now. If sub-prime lenders are the scum of the earth, then we're the stuff that even they scrape off their shoes when they get home.
That's me.
If somebody borrows $100 from me, I charge them $17.65 for it until their next payday, up to two weeks away.
And maybe 17.65% interest doesn't sound so bad, but you have to remember that this is just for fourteen days. If you figured that as an APR, it would be over 400%. If their payday is a week from now, we could be talking an APR of over 900%.
And yet people still do it. We barely even advertise, and yet not a day goes by that new people don't come in our door asking for money at that rate. Even though we tell them the fees, and quote them the APR, both out loud and on their contract, every single time they come in.
Crazy, right? What are they thinking? Why do they do this? Is it because they have no discipline? Is it because they don't understand what they're paying?
Quite the contrary. They're leveraging their credit, the same as anybody else.
If they've got two $50 checks about to hit their bank that are going to bounce, they're about to get hit with two $15-$35 bounced check fees from their banks, and two $15-25 bounced check fees from the places they wrote the check to. That $17.65 will save them $30-$70.
The fact is, there is a lot of money to be made off of people who are just scraping by from month to month. Fees, penalties, and other charges.
It's expensive to not have money.
If you just look at the numbers, borrowing from Peter to pay Paul can seem not only like a sensible option, but your only option.
In other words, my customers might get their payday loans for the exact same reason some people maintain home loans. They see it as saving them money.
Or, they’re seeing it as an investment in future income. They’re borrowing money to get their car fixed because they need it to get the work to get all the money in their paycheck.
Or, they’re in a dire straight. Something has happened to which they see money as the only solution, and in order to get their peace of mind and security back, they need money.
And then, when the time comes to pay off the loan, they take it out again right away. Because they just look at all the bills they have piled up and think "$17.65 is less than $117.65. If I pay just the fees, it will free up more money this month to do other things. I'll just do this one last time."
And if they do that twice a month for three months, they'll have paid back more than the $100 they initially borrowed, and still owe the full $117.65.
We do things to try to encourage them to be more responsible. We make them pay the balance in full every time rather than just take the $17.65 and "refinancing" the $100 again.
And I try to talk people into taking out less each time--say, $75 instead of $100.
But these folks are not getting that $100 out each month because they have some crazy or silly expense they just couldn't help themselves from rushing out and buying, oh-wouldn’t-this-be-fun.
They are getting that $100 out again each month, because if they don't get it out, it means that either their lights or their prescriptions or some other bill doesn't get paid.
My advice is not to some arbitrary person that only exists in my mind. It is directed at real people who I see every day. Real people who I would love to see do what it takes to make that tiny course correction from living just a tiny bit outside of their income level, where they're digging themselves a little bit deeper and a little bit deeper into a hole that will eventually overwhelm them, to just a tiny bit inside their income level, where they're building up a supply of security and savings that gets a little bit bigger and a little bit bigger until it eventually helps them see the light of day again.
Real people who see credit as their only means of having any hope of getting through the month. These are not silly people with no self control. These are stressed out people who are desperate to find solutions for serious problems.
My message for them is that while it may seem that credit is giving them that security in the short term, in the long term it only makes your problem worse, as the interest and payments expand each month and eat up a larger and larger portion of your income, and your find yourself being forced to turn to more and more credit to solve the problem.
It’s terrific that this is a foreign world to you folks, but it’s the world I live in every day, and it’s just about everybody I deal with. These are people who, if they were carrying a credit card just for the gift certificates would end up running up a balance eventually, and not because they just couldn’t resist the Tri-annual White Sale. It would be because the car broke down, or their child got sick, or their father needed bailed out of jail, or any other crises that they had to deal with and they saw no alternative but the available credit on that card.
I am not ashamed of what I do for a living. I know that I have genuinely helped people with genuine problems. I know that when 60 Minutes tries to convince you that payday lenders are evil predators preying on the poor, or when your local politician goes off about how payday lenders need to be regulated, they’re being prodded by lobbyists and organizations beholden to banks and credit card companies and other people who stand to make even more off these customers' money problems than we do. We provide a necessary service.
And so if I can understand how a 400% APR loan can be a necessary service, then I can certainly understand how credit can be a necessity at times. I’ve already said in this thread that I probably will eventually be forced to get a home loan.
But that does not mean that my advice is bad.
While debt can be a short-term solution, it should never be seen as a long-term financial strategy. Especially not for people in the situation I’m describing.
For the people who are looking to debt for their peace of mind, the people who think they can rest easy because if an emergency comes up because they’ve got a credit card company that’s there for them or a payday loan company that’s there for them, they need to know that the price they’re paying. They need to know that ultimately every moment of present peace of mind they buy with that card is coming at the expense of future peace of mind.
They need to be told that it’s better not to get the card, and that at the price of a little of their present peace of mind, as they scrimp, save, sell, and struggle to get that first $1000 of savings put away for emergencies and then become savers all their lives, they can then have future peace of mind that will last them far longer than their lines of credit will.
I know. This isn’t conventional wisdom now, even if it used to be. People are probably still going to argue with me. It really goes against the current mentality of “Make money fast, without using a penny of your own money!” or that “People who live within their means lack imagination!” This certainly isn’t advice anybody’s going to be able to sell you for a lot of money on late night infomercials or that will put dollar signs in anybody’s eyes.
I’m okay with that.
You might say I’m more and more at peace with it every day.
Posts: 1894 | Registered: Aug 2000
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quote:First, Dag, fugu has advocated the use of debt as leverage. Read his first post in this thread. He’s an advocate of the idea that carrying debt isn’t bad as long as you value the thing you’re in debt for enough. So I wasn’t just spinning that stuff out of whole cloth.
...If you have to keep telling me how what I’m saying doesn’t apply to you, then maybe in that part I wasn’t arguing with you.
And so have I, by your definition. I probably wouldn't have bothered responding if people weren't advocating waiting to buy a house until one can pay cash.
Moreover, you included me in your sweeping comments: "Dag and fugu and everybody else are exactly right when they say this isn't neccessarily the fastest way to make money."
I don't see how I could assume that didn't apply to me. Moreover, the parts I responded to were directed at me:
"Your point (and fugu's) is that the risk of debt can be managed. That's also true."
"You'd rather give up some security in the name of money--I'd rather give up some money in the name of security."
"Everybody's argument with me seems to be, "You can have both." Of course you can have both. Everybody's got some degree of both. But you always have to give up a little bit of one to get more of the other."
All were in a portion direct at me in particular.
quote:In other words, that blanketly telling people “Get a credit card,” without knowing their situation or priorities can be as bad of advice as you consider blanketly telling people not to get a credit card to be.
And no one has done this. The closest has been fugu, but he qualified from the start that it should be payed off (in general). Then he gave examples of when debt is not bad, and the general criteria for that.
quote:But even if Fugu and I can’t agree on this, can you and I at least agree that if somebody does have a credit card, they need to never, ever actually use the credit feature, something like what Rivka suggests? Can we at least find that common ground?
No. For example, if I had gone to law school immediately after college (as originally planned), I would have needed a new wardrobe before I could start at a firm. That would cost way more money than I would have had at the time. Credit would have been the only option I had for acquiring that wardrobe.
I would have been smart about it and not gotten more than I needed. But there would have been no other way to get the necessary clothes other than a credit card.
In fact, that's how I got my interview suit in college. And that was a good use of credit.
quote:You’re getting what you want. Great. I understand. Is this still about me saying I didn’t get it? Fine. I get it.
I’m not trying to “prove you wrong.” I’m just trying to get you to see where I’m coming from.
This is disingenuous at best. You are making factual assertions about the plans unrelated to values. For example, you claim your plan will get you home ownership more quickly:
quote:Again, their plan will get you into a big home faster. Their plan might give you more money. The risk is that if anything goes wrong, you still have to figure out where to get money to pay your mortgage.
My plan will get you the security of owning your own home faster. My plan might leave you with a better home at the end, even though you will spend a while living in houses that aren't as nice as your friends who are willing to take on the debt and keep it. However, you will more quickly get into a position where, if there are problems, keeping your house will not be added to your list of worries.
So the only thing that would make either one of these plans "bad advice" is what your values are.
You keep insisting that this is about different "values." Partly it is, but statements such as the one above are wrong factually, no matter what your values are.
You have misrepresented the plans others have given for home ownership as being about getting into a big home faster. You have also made a purely factual claim: "My plan will get you the security of owning your own home faster."
This is not true. Your plan will not get you the security of owning your own home faster. Given the same homes (in other words, not letting you casually change the comparison to a "bigger" house as you need to do to make your point), my plan will get you owning each one more quickly.
quote:<bunch of stuff about the payroll loan business>
But that does not mean that my advice is bad.
No, that does not mean your advice is bad. What makes your advice bad is the false dichotomies you set up and the factual misstatements about risk and the speed of paying off a mortgage v. the speed of saving up before one buys the house.
Those factual assertions are wrong. Your advice, so far as it concerns mortgages, relies on these misstatements. Therefore, such advice is wrong.
quote:It really goes against the current mentality of “Make money fast, without using a penny of your own money!” or that “People who live within their means lack imagination!” This certainly isn’t advice anybody’s going to be able to sell you for a lot of money on late night infomercials or that will put dollar signs in anybody’s eyes.
Again with the casual switch from the advice given in this thread to arguments against living within your means.
Posts: 26071 | Registered: Oct 2003
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quote:Given the same homes (in other words, not letting you casually change the comparison to a "bigger" house as you need to do to make your point), my plan will get you owning each one more quickly.
But this is where, again, we disagree.
Let's reexamine my first suggested plan.
If two people get a home today, and one gets a small condo that he can afford to pay off in 7-10 years, and the other gets a bigger, full-sized, nice home, that they can afford to take a 30 year mortgage on, the first guy will own his home faster.
He will not be living in as nice a house as the second guy, but he will own the home he's living in first.
7-10 years vs. 30 years--it's no contest.
I realize that's not what you're talking about, but first we need to be clear that to some of us, that alone is something.
But I also understand that's not the assertion you're challenging, so let's keep going.
For the next 10 years, both of them will be getting some of the equity benifits as the prices of their homes go up and down, and as the prices of the homes around them go up and down.
And while the mortgagee is putting the full amount of his mortgage payment into the house he already has, the guy in the condo is putting the full amount of his "mortgage payment" into mutual funds at 10-12% interest. In the meantime, the mortgagee's payment is split between equity and interest.
What you're banking on to say that the mortgagee will definetely own the big one free and clear before the guy in the condo can afford a comprable home free and clear is that the cost of homes will go up faster than the interest condo-boy earns will allow.
However, the amount that home prices will change each year is a variable. And during the last 30 years, we've had more years where the percent change was less than 12 percent than it was more than 12 percent.
And all condo boy's savings has to do is keep pace with the price of the housing market for him to be able to pay for the big home with cash faster by earning intrest than mortgage boy can afford to pay off the same home home while paying interest. Granted, the intrest on the mutual funds is a variable, too, but the 16-18% advantage his money has over morgage boy's on average will do him better in the long term.
So then, as mutual fund boy upgrades to a new, more expensive house after 10 years, and continues to do so every 10 years after that, the equity advantage will become smaller and smaller as the full equity balance of each new home also rises and falls with the housing market.
There are no factual misstatements here. My friends who have done something similar to this did afford bigger houses faster than my friends who just plugged away at mortgages.
And they had the benifit of having their own pink slip the whole time in case anything happened.
Again, that security might not have the same value to you as it did to them, but that doesn't make any what I'm saying a "Factual misstatement."
There are some factors I'm leaving out, the biggest one being taxes. Mutual fund boy has to save with after-tax dollars, while Mortgagee boy will be getting a "tax deduction" for his mortgage. Plus Mutual Fund boy will have to pay additional taxes on the interest he's earning.
(Just so all non-homeowners are clear, there are actually no tax benifits to owning one's own home. There are only tax benifits to being in debt for one's own home. In other words, if I say I'm willing to pay $5,000 to my bank in intrest, the government is willing to refund me a little bit of that $5,000 on my tax refund. But I only get that if I pay out the $5,000 to my bank first. If that sounds like a good deal to you, start sending me checks and we can work out a similar arrangement.)
So I think the tax situation will level things out as well, but still, look at it this way:
If the average increase in home price is 6.5% per year (which it was from 1972 through 2005), that's about the same as a 30 year home loan interest rate. A 30 year home loan is just keeping pace with the increase in the value of the house.
Which means that even if mutual fund boy was only getting 6.5% on his money, and he didn't have any equity on his current house, he'd still be able to keep pace with mortagee boy, and pay off at the same time as him.
So he could put nearly half of the 10-12% interest he was actually earning towards taxes, and still at least keep pace with a mortgagee. And he would still be living in a home he owned, even if it wasn't that one yet.
I admit I would like to see more tax savings programs designed for saving for big-ticket neccessities like homes, to level out this aspect of the playing field (actually, it wouldn't just level the playing field, but would tip the scales even more towards savings, in my mind), but since there's no lobbying group for frugal people, I don't know that this will happen any time soon.
And even aside from all of this, there's still just the fact that when you want something, you're going to be trying harder for it. You're going to find ways to make it happen. So if a person makes it a goal to get themselves into a certain sized home, and pay cash for it, they will search for additional means of making this happen that the person with other goals will not.
And in the end, that determination will prove to be just as much a factor as interest rates, home prices, taxes, and every other part of the equation.
ETA: Also, if you want something comprable to the way you can save money on your mortgage by having a somewhat better credit rating, there's this: You can usually get a better price for a home you purchase when you're able to tell the buyer you can do the deal without having to wait for your bank. Many sellers--especially the ones commonly called "motivated sellers"--will take a lower price that's a done deal than wait for a higher price that's going to take a while.
quote:If two people get a home today, and one gets a small condo that he can afford to pay off in 7-10 years, and the other gets a bigger, full-sized, nice home, that they can afford to take a 30 year mortgage on, the first guy will own his home faster.
...
What you're banking on to say that the mortgagee will definetely own the big one free and clear before the guy in the condo can afford a comprable home free and clear is that the cost of homes will go up faster than the interest condo-boy earns will allow.
Come on now: you even quoted what I said: "Given the same homes (in other words, not letting you casually change the comparison to a "bigger" house as you need to do to make your point), my plan will get you owning each one more quickly."
Given the same homes. That means starting with the same small condo.
If you want to show calculations that actually reflect what I said, I'll examine them. Otherwise, I'll just point out that your statement of the assumptions I've made is wrong, basically because you're examining something other than what I said.
I'll clarify:
Person A and person B each by the same small condo with a 30-year mortgage, 20% down.
Person A makes extra principal payments to pay off the house in 10 years. Then person A continues to live in the small condo until he saves enough to buy another house worth twice the condo for cash.
Person B makes extra principal payments at the same rate as person A. After 10 years, he sells his home, puts it all toward a down payment on the new bigger home (also worth twice the condo), and takes out a mortgage for the rest.
Person B will be ahead of person A. Instead of the savings person A is putting aside while living in the small condo, person B is making principal and interest payments on his big house. After 10 years, he will have the house paid off, just as Person A is buying the bigger house.
quote:There are no factual misstatements here. My friends who have done something similar to this did afford bigger houses faster than my friends who just plugged away at mortgages.
The person following my plan will plug away at his mortgages, too. What he will not do is wait to upgrade his house until he can pay cash. And that's the difference.
You have analyzed an entirely different plan to show yours as better. In doing so you have made faulty assumptions and those faulty assumptions have led you to an incorrect conclusion.
quote:And all condo boy's savings has to do is keep pace with the price of the housing market for him to be able to pay for the big home with cash faster by earning intrest than mortgage boy can afford to pay off the same home home while paying interest. Granted, the intrest on the mutual funds is a variable, too, but the 16-18% advantage his money has over morgage boy's on average will do him better in the long term.
Here is the real heart of your mistake. As the housing market increases by rate X, that rate is applied to the entire value of the house, not just the money that the person has in hand.
Posts: 26071 | Registered: Oct 2003
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quote:You can usually get a better price for a home you purchase when you're able to tell the buyer you can do the deal without having to wait for your bank. Many sellers--especially the ones commonly called "motivated sellers"--will take a lower price that's a done deal than wait for a higher price that's going to take a while.
That waiting period is necessary for a whole host of protections that mortgage companies insist on.
I would not buy a house without those protections. Because of the way pre-approval works, I would have saved about three business days had I been paying cash, because I wanted title search, title insurance, appraisal, survey, and inspection whether or not I was paying cash.
Posts: 26071 | Registered: Oct 2003
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quote:Instead of the savings person A is putting aside while living in the small condo, person B is making principal and interest payments on his big house. After 10 years, he will have the house paid off, just as Person A is buying the bigger house.
I actually consider this to be a perfectly valid statement and I'll go ahead and agree with it completely.
Both of these are actually compromises to the two extremes (someone who refuses to borrow any money until he has a home on one side, and someone who gets a 30 year mortgage for the big house straight out of the gate). Mostly I was (as you correctly point out) arguing against the straight-out-of-the-gate other extreme, not against a plan like the one you suggest.
Person B still utilized some of the principles I'm advocating to pay off the home faster than the person with a 30-year mortgage from the start, but that hardly makes me wrong--it just means he found a different level of compromise than the plan I made suggested. And "Degrees of compromise" is what I was talking about when I suggested the plan to begin with.
See, the core of where we disagree is in this statement:
quote:Person B will be ahead of person A.
Person B will only be ahead of person A if he considers the size of his house to be more important than the security of knowing he owns it.
Different people will be jealous of person A and different people will be jealous of person B during that second 10 year period.
Person A's plan will be a more appealing compromise for people looking for a greater degree of security.
Person B's plan will be a more appealing compromise for people willing to have a little bit more risk in exchange for a greater degree of comfort.
In other words, to really identify which plan is better, from an economic standpoint, first you have to quanitify the utility each person is gaining from their plan. And since each person is gaining the utility they wanted, each person is benifiting in the way that gives them the utility they value most.
This is basically the core of what I mean when I say that, at is core, this is a difference in values. Do you get more comfort from the size of your house or from the size of your mortgage?
To me, small mortgage is worth more than big house--I'm going to be person A.
To you, big house may be worth more than small mortgage--you're going to be person B.
Everybody finds their own balance, not just between person A and person B, but between the two extremes. They find the balance that's right for them and what they value.
So maybe that can be our common ground. We can both agree that everyone needs to find the balance between the two that's right for them, and that they should make the decison as informed as possible through solid understanding of financial principles mixed with their personal comfort levels. Knowing how money works, combined with knowing themselves enough to know what truly brings them peace and joy can allow them to start shaping their own future in the way that best meets their needs, rather than taking a more passive view of their finances and simply dealing with problems as they come.
posted
As a person who is STILL trying to get out of debt, let me tell you with no doubt in my mind that it all began when I got a credit card. That 'buy now, pay later' mentality is the worst thing a young person can acquire, because you have little money and so much you want. I reflected lately on how debt reduction, which leaves me no spare money, means that someone else is taking the holidays I want to take, buying the new car I want to buy, and paying off the house I haven't got the deposit for, all using my money to do it. Now that I'm older and earning better, I could save the price of a flight to Japan in about six weeks if I wanted to. But unfortunately that potential spending money is all going to pay off debt. I'll get there in the end, but it's a long, disheartening, and boring process.
Learn to wait for things, learn to save, learn to live within your means. Learn to shrug your shoulders at the latest new must-have item and say, 'I don't need it" or at least, "I don't need it right now." You will be so much happier for it, and that's a promise I make with no fear of ever being proven wrong.
Posts: 2451 | Registered: Aug 2001
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posted
I should emphasize that none of us are recommending or supporting an attitude of 'buy now, pay later'. We are recommending sometimes doing so when one specifically gains from the practice; that is, to live within your means from a long-term perspective.
Posts: 15770 | Registered: Dec 2001
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posted
In addition to what fugu said, many of us are recommending use of credit cards simply as a way to pay now and postulating two benefits for doing so: 1) saving money, whether through time value of money, rewards, or better credit ratings (which, for most people, will be necessary when buying a house), and 2) convenience and efficiency in managing one's finances.
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