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On Finance: Debt

I believe that it is a clear signs of the times that debt creates far more problems than it solves.

I am no longer able to believe that using debt financing (aka credit) is a sound financial decision for anything which is not an appreciating asset whose value can reasonably be expected to remain above the total cost (principle plus interest). Using credit for other types of purchases is a result of bad planning and/or failure to live within one’s current financial means.

To put it more plainly: with the exception of a house you should not purchase anything on credit.

The answers to the obvious questions are:

— Yes, this includes cars. Pay cash for something that will run safely and then put aside money into savings as if you were making car payments. This means you’ll have the money to pay cash for you next car. You’re car will, in the end, cost you a fraction of what it would otherwise.

— Yes, it is OK to use credit cards for convenience — as long as you payoff the total balance when the bill comes. No exceptions.

— No, equity financing of your home for things which are not home improvements is not considered a home purchase — don’t do it. Financing things on home equity is an exceedingly bad idea and will prove to be a root cause of much of the personal financial disasters that will happen in the coming years. Consider your home equity on par with your retirement funds — do not touch.

— Borrowing money from your retirement fund is a mistake.

I can think of no exception to the fact that using credit is a result of bad planning and/or failure to live within one’s means.

You can be miles ahead of everyone else by simply not using credit. You just have to care more about your future than you care about your present.

(A footnote: There are non-home items which can be expected to appreciate in value and represent sound investments purchased on credit. These are a different subject and are not typical of a the average household spending considered here.)

Posted by Paul Gernhardt on Sunday, October 19, 2008