Debt is generally bad.
Yes, occasionally, after a health emergency, it can’t be avoided. And while some debt can even be positive, for instance, say, a low-interest mortgage in a location that’s expected to appreciate? Or even a small business loan?
At first blush, no argument.
However, the worst debt of all is that which is accrued after buying things that we don’t really need.
Even great savers aren’t immune to this.
I have a friend who earns a good salary and saves a lot for retirement. However, he not only has a big family, he also has a number of discretionary expenses. A few years back he bought a moderately expensive car.
If I were in his shoes, I personally would not have purchased that vehicle.
However, he works hard, and he wanted it, and, so, eventually, he succumbed to the challenge of denying himself that reward.
As an aside, purchasing the “base” model of that vehicle would have saved him $14,000.
Now? After he makes a payment – tongue in cheek – he’ll joke about how he’s never once hadanyreason to use $10,000 of those upgrades. My friend regrets the extra money those upgrades (and higher insurance premiums) added to his monthly outflow, and he nownot onlygood-naturedly admits it - he vows to never do it again.
Outspending your income was once commonly referred to as, “Trying to keep up with the Joneses.”
Ever wonder how that phrase entered our lexicon?
“Keeping up with the Joneses” came from a much-loved comic strip of the same name that debuted back in 1913. (It ran in newspapers all over America for 26 years.)
But here’s the thing about those infamous comic-strip Joneses: They were broke.
When it comes to money, my experience has been that it’s miles better to live exactly like(place your name right here)than it is to try and emulate anyone else.Especiallythose Joneses, who all live seemingly perfect lives on social media.
Avoiding falling into the Joneses’ trap means creating a plan and living within your means.
So, if you want to increase the odds that you’ll have enough money to pay for a long retirement? Avoid debt and prepare for emergency expenses at every turn.
Besides, being like the “Joneses” is so 1913.
Here are 3 tips for going your own way.
1. Make saving a passion
We meet with a lot of people who have accrued a good-sized nest egg in their retirement accounts, but who also carry a lot of debt. Couples are understandably proud of the $500,000 they’ve saved in their 401(k)s, but they tend to look the other way when it comes to debt.
Again, a low interest mortgage on an appreciating (but affordable) home is not a bad thing (just try and pay it off before you retire). But the $45,000 loan for a child’s wedding?
I like to celebrate. You like to celebrate. But deciding toborrowmoney for a huge wedding is the epitome of keeping up with those darn Joneses. And I hate to see it.
Saving as much of your income as possible for retirement, and as a cushion against emergencies, is commendable. And you know something else? Once you get addicted to it, it’s fun.
The fact is, there are very few people who come to regret a lifetime of saving. People who are passionate about putting money away and who learn to deny themselves the things they don’t really need have an air of confidence about them that is palpable. They simply feel better. They are in control.
Most people should assume they are going to live a good long time, so make building a financial safety net, and staying out of debt, a top priority.
One of the ways to do this is to treat saving as an expense. I understand: The automatic deductions of a retirement account are easier.
Out of sight, out of mind.
Look at your take-home income, figure out what you can afford, and if you haven’t, open a separate account (with no ATM card attached), and make an automatic deposit (or two) each month.
Even if it’s just a few hundred dollars.
2. Credit cards are the enemy (if you're not careful)
Does “credit cards are the enemy” sound extreme?
For most consumers, credit card debt happens slowly. You pay for things on cards to get miles, or points, and you pay them off each month… until you don’t.
Then you use it and use it and the balance grows.
Soon, you are paying $300 a month in interest. Then $400.
That’s nearly $5,000 a year for air.
Think about this: Credit card companies spend millions of dollars each year figuring out new and better ways to coax you into debt. Even the Federal Government now takes credit card payments.
Don’t give in.
If you use credit cards, your goal should always be to pay off the balance in-full (and on-time) each month. This way, you get the rewards, but not the penalties (interest and/or late fees).
3. Remember that even “good” debt can go bad
There are two types of debt obligations that most people consider to be reasonable: Student loans and mortgages.
Mortgages typically exist to buy assets that tend to appreciate over time (plus, you get to live there), and student loans go toward (or they should) an education that will add to a person’s earning potential and knowledge.
But even the best of debt can go wrong.
Think back to 2007. Had you ever seen more luxury SUVs on the road than that? I hadn’t.
Many of those vehicles were purchased against the equity andpresumedfuture appreciation of homes.
The government backed the banks giving those loans, and so money was easy to come by, and people borrowed and borrowed, and the result was that home prices rose faster than wages.
Then a tipping point was reached and the bubble burst.
Generally speaking, don’t borrow against your home’s equity.
And, as for student loans? Realize they are now the second largest source of debt in America.1Yes, we collectively hold more student loan debt than credit card debt.
But mortgages are often good, and student loans are sometimes good. So, what’s the answer?
Know your options. You likely have more than you realize.
Before taking out any loan or debt, speak with yourfiduciaryfinancial advisor.
In many circumstances, when it comes to paying for things, you probably have options that you’re not aware of. And, of course, when you talk to a professional about money, you have absolutely nothing to lose and much to gain.