Tuesday, April 5, 2011

Debt and the frugal family

I've mentioned before that I'm not a trained professional tax preparer or financial planner or anything of the sort. I'm just someone with good practical experience (and a certain amount of self-education) on how ordinary people can manage better. So take what I say with a grain of salt if you prefer professional advice, just evaluate anything they tell you in light of their own possible interests. My only interest is a wish that families and individuals have their finances in control so they can really enjoy life and each other.

Debt is a sticky question for a lot of people, especially now. Most sources, at least a few years ago, divided debt into categories that can roughly be summarized as "consumer" (credit cards, cars) and "investment" (mortgage, business) debts. The difference was supposed to be that consumer debt was for consumables or possessions that lost value while the healthy investment debt was in things that grew in value, so were an investment. 

About 7 or 8 years ago, in an online group for thrifty living, I tried to suggest to people in shaky financials situations that they should look for the cheapest house that they could afford, preferably one with a payment they could afford on one income. I was loudly denounced, particularly by a couple of Realtors (their use of the capital R). Real estate always appreciated in value and people should always buy the most house that they could, and I was essentially called a liar when I tried to point out cases of real estate "bubbles" that I personally knew about. Of course, their argument also ignored the main point I made: keep your expenses low enough to survive personal catastrophes. I let their shouts silence me, something I've regretted as I proved all too right.

However, in a general way, a mortgage can be healthy debt. Credit card debt rarely is and is usually VERY expensive. Car loans are somewhere in between, but cars depreciate and have to be replaced. College loans are generally considered investment debt...to a reasonable point (I know a couple whose undergraduate degrees left them in so much debt that they'll be paying it off still when their oldest child starts college). But best of all is to owe nothing and have savings. Keep that in mind. Paying interest on money leeches it out of your pocket and into someone else's. If you're paying even $50 a month in interest on car and consumer debt, that's $50 you don't have to spend because you wanted something NOW.

Continued tomorrow...

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