T Nation

Living With Debt

Can one who is accustomed to paying cash for everything can become accustomed to living with some debt, year in, year out?

Here is an example. I always pay cash. The only debt I accept without problems is real estate, because I am building equity and I know long term that I cannot lose. Of course, short term, the housing boom gives me an additional security because I can always resell higher than what I purchased.

(I will add that in the current housing boom, my tentation is to do like Troy did in The Apprentice and earn a quick profit, repeatedly, by dolling real estate up and selling it as quickly as possible. Verrrrrrrry tempting. As long as you have a good salesman friend who can help you get rid of it quickly.)

My experience with tenants has been that cash flow is the name of the game. Banks won`t bother you if you pay monthly. Some even accept you use your margin of credit to make your R.E. payments.

So, ultimately, its not how much debt you have, its how much profit you make from it. If you have a Reasonable Expectation of Profit (REOP) you should not any problems with the taxman either.

So debt can be viable, especially if one factors in the price of lost opportunities or failure to act on a good deal.

But outside of R.E. ?

On one hand, I see people with loaded credit cards and they seem to have no problem living with it. I reason they have confidence in their lifestyle and that they will always find a way to make the ends meet. Worst case, there`s always some time of insurance or bankruptcy mechanism that can kick in.

On the other hand, paying cash has some advantages. But even Donald Trump borrows. I am most probably too much of a perfectionist, insecure, or have never been able to find a good reason to accept debt.

So, what helped you accept debt as a fact of life?

DAN,

Excellent post, you are one very bright guy who is no doubt going to make a large fortune someday!

My advice: stay out of debt unless it is directly related to some sort of stake in equity as in realestate, a business etc.

I see quite a few guys driving around cars they can’t really afford, going places that they can’t afford and basically filling their lives with material possesions which in the end could very well bankrupt them. My first rule of making money is: always live below your actual means. This does two things: it frees up cash for you to invest in a business. And it also keeps you out of debt. You are basically saving more and spending less.

The part about this methodology is that when it pays off for you in a few years your lifestyle (remember the one you are living below) expands! You are now able to live an expansive life while still living below your means!

By the way, if you are not sure of the realestate market in your area I would buy and sell, rather than buy and hold. Both can work, but sometimes realestate gets soft and stays that way for years. Obviously if you have tenants and you are in a positive cash flow position there is no problem.

Again, great post and best of luck!

Zeb

I agree good post! We live the way you do. Real Estate is the only debt we allow. Everything else must be purchased with cash only have we have ‘paid ourselves first’.

Obviously this is not easy for many esp. the young. We began purchasing homes in our early 20s, fixing them up and selling for a profit. It was a great way to build equity.

Hopefully readers (younger than us) will read the post and try to live within their means. I’ve seen too many people purchase ‘stuff’ with credit cards and run into terrible debt problems and have nothing to show for it.

Excellent posts by all. There definitely is “good debt” and “bad debt”. Good debt is real estate as long as you’re not leveraging yourself beyond a point that you can’t make a few months rent on your properties when they go vacant. Good debt is when it is invested in a business you started for yourself. Can good debt still be risky? Yes. But the payoff in both circumstances can be high too.

Bad debt is everything else. Credit cards, car payments, etc. I would even say my primary residence is bad debt (personal opinion) because on a month-to-month basis it’s pulling money out of my pocket, not putting money in.

I live like the others do on this thread. I live well below my means. I have 2 cars paid for. No credit card debt. Have 3 months in emergency fund savings in a highly liquid money market fun earning 3% interest. My wife and I putting tens of thousands of dollars per year in retirement accounts. We also began saving for a son’s education (he’s 4 yrs old) in a 529 account. I have a 15 year mortgage that I will pay off in 12 years or less. The goal is to get rid of every single debt in my life by the time I reach age 45. Freedom is when you don’t owe anyone anything.

good points randman. you sound like myself and my husband!! lucky for us we live in the midwest where i’m sure housing prices are lower than your area!! now our property taxes are in the top ten in the nation which stink!! I work for myself, my husband does not but is looking into some opportunities to invest in some business. are you self employed?

p.s. we have two four yr. olds. our finanial planner told us if we invested 25K each this year that would cover college. how do you feel about that?

The difference between a bad debt and a good debt is simple. A good debt is an ivestment. You can invest in real estate, or you can invest in a lot of other things. The key is that you expect a return on investment.

You don’t invest in consumables like cars, tv’s. They give no return on investment.

Is there a grey area? Sure there is. If you buy a computer to surf the internet in your free time, that’s not an investment. But if you use it for work and can raise your productivity with it, than it would be a good investment. Just don’t go overboard. I saw a show once where a woman ordered a PC and boasted to her mum that she now could write a best selling novel…

If you’re a courier and you buy a pick-up truck, that could be a good investment. If you use it only to go shopping, than it wouldn’t be an investment at all.

Alright I’ve got a question for you all. As of this moment I’m completely debt free, I don’t owe anybody anything, except a beer or two here and there. I recently turned 24 and I’m finally at a point where I’m making a fairly good amount of money, at least compared to what I’ve been making the past few years.

Now I’ve got a car that’s paid for, an '01 cavalier, that’s probably got a couple years left in it before it starts giving me problems. It’s been through some rough things and I don’t treat it very well, so I’m not sure it’ll last very much longer than that.

Anyway, like I said I’m at a point where I’m making fairly good money and I’m in a good location to buy a decent car, nothing fancy, probably mid 20s. Would I be better off in waiting to buy the car later with a bit larger down payment (might be able to do about 10k right now), or go ahead and get one now while the getting’s good?

I’m single, no kids or anything, so just myself to worry about. Any tips or recommendations?

I’d say find a good used car and pay cash or finance as little as you can.

For example, my husband has a company car. At the end of the fleetlease agreement we can purchase them for a great price. Do you know anyone in that situation? Many of our family members have purchased cars that way.

I also believe vehicle debt is not as bad if you A. don’t go crazy and finance a hugh amount and B. if you plan on driving the car for many years. good luck!

This thread rules. That’s all I have to say.

(Although I am not liking the sound of this whole “living below your means” concept . . . ;-))

Absolutely buy a used car if you want to continue on your debt free lifestyle. Let someone else by the new car for you and have it significantly depreciate in value over the first couple of years of its life.

I will never visit a dealer lot again. You pay way too much in fees and your also buying an asset that will plunge in value the first few years of its life.

A few years back I decided on a Toyota 4Runner SUV because I like the reliability of Toyotas (my other car is a Camry). I also was willing to settle for a model in the 1998/1999 range because the blue book value was affordable but it still wasn’t old. Since you could probably get 200,000 miles out of a Toyota I was also willing to go with a car that had up to 60,000 miles as long as it was meticulously maintained. I went through the classified ads and interviewed eight to ten people and inspected each and every car.

I was looking for someone who was desperate to sell and had meticulously maintained the car. When I found that both of my requirements were met I had my mechanic do a thorough check of the car to make sure there were no defects. I ended up paying cash for a car that is in great shape and will last me many years.

Also, never trade in your old car to a dealer. You won’t get nearly the value for it you could by selling it yourself directly to a buyer. As a matter of fact, I used the auctioning behavior of the Internet to get maximum value for my wife’s old car (Mitsubishi 3000 GT). We couldn’t keep the car anymore when our son was born because it was a 2 seater. She was upside down on her loan but because I auctioned it off I ended up selling it for a couple grand over blue book value.

[quote]perfectlycrazy wrote:
good points randman. you sound like myself and my husband!! lucky for us we live in the midwest where i’m sure housing prices are lower than your area!! now our property taxes are in the top ten in the nation which stink!! I work for myself, my husband does not but is looking into some opportunities to invest in some business. are you self employed?

p.s. we have two four yr. olds. our finanial planner told us if we invested 25K each this year that would cover college. how do you feel about that? [/quote]

I was fortunate/lucky that I bought my house 5 years ago before the huge housing appreciation boom occurred. But I also made a conscious decision not to continue to buy up to the next house and have my property taxes triple and my mortgage grow because I think I needed more house. Which 98% of the people with my income do on a daily basis around here. I DID NOT want to become house poor.

That’s great that your already starting to invest for you two 4 year olds college educations now. My only question would be “do you have your own retirement set first?” First and foremost, make sure your funding your own retirement before saving for your kids college education. Many, many people make this mistake. Your kids will eventually grow up and move out but you and your husband will be left behind and will still want to retire at some point.

Kids can always get college loans/grants to pay for school. Now I’m not saying don’t invest money for kid’s college education but just don’t do it at the expense of your own retirement. If that means saving less money for college to fund your own retirement then so be it. So what if you can only pay for the first year or two of college. Again, loans/grants can take care of the rest. Your kids will also be working part time to help pay for some of the costs themselves. I hope this makes sense.

oh yes, we do our own retirement first. and i did not plunk down 50K this year!! that was just his ‘if you do that now that is all you will have to do’ recommendation. just wondered how much others were saving on a regular basis for their kids (and ours are the same age).

My parents paid for my college and my husband paid for his own so I know there are many options! Hopefully I will raise two good diligent and hard working boys!!

I think some people are simplifying debt too much. You can have “good debt” from purchasing a consumable, if the net present value is greater than that of paying with cash. For example, food is a major expense for most of us. If steak goes on sale at 50% of regular cost, I may buy as much as I can eat and freeze without it going bad. This might mean I have to use a credit card, and now have debt. This is an very simple example, but I think it shows my point.

Obviously, you need to differentiate between staples and luxuries to do this, or you would waste all your money on stuff you don’t need because it was on sale. Plan what your purchases, and don’t buy garbage you don’t really need. Use credit cards and other debt to leverage investments (if you know what you are doing; ie the benefits vs drawbacks of leveraging) or for cashflow timing. Don’t use it to “generate income” and you will be in awesome shape.

But by far the most important thing is not wasting money on things you don’t need. For me, this includes a car; it’s just not a worthwhile proposition.

This is in the same vein, but not directly related to debt.

I’m 20 years old, and just last week I took the first of many steps in setting myself up to be financially secure and content.

After reading The Wealthy Barber, I decided to ‘pay myself first.’ Currently, I’m contributing just under 4,000 a year into a Roth IRA, and also have 10% of my monthly income directly deposited into a seperate money market account, until I build a decent foundation.

From there (soon), I’ll be doing some research on various mutual funds and will probably pick quite a few to help diversify a bit.

I think growth/income funds will make up the bulk of my investments (long-term, the returns on some I’m looking at are fantastic with little risk.)

I’m also going to stick some in pure growth funds.

From there, it’s going to be real-estate, and then…

…I guess the sky’s the limit.

I’m just glad I’ve implemented these first steps. As Shugart says: “Shut up, Do stuff.”

-Nate

Plenty of very sharp T-Men and Women on this thread!

As to usafffirefighter’s question regarding the purchase of a new car. Randman had a great answer:

“Absolutely buy a used car if you want to continue on your debt free lifestyle. Let someone else by the new car for you and have it significantly depreciate in value over the first couple of years of its life.”

The only thing I will had, having had sold cars several years ago. Try not to get anything with high mileage as that can come back to bite you. Try to find a car that is two years old with 30,000 miles or less on it. Also, do some research on the previous owner and find out if the were “hard” miles. If you can buy it directly from the previous owner all the better. You can figure out very quickly how he/she drove the vehicle; city miles vs country miles etc.

As far as the tone of the thread, there are some very sharp guys in their 20’s on here!

Most guys in their 20’s are too busy with other things to realize the benefit that they could be taking advantage of right now! You already have an asset which is diminishing every day: your youth! If you take adavantage of that (and other things) you can make more money than you ever thought possible.

It’s all about discipline, no different than training. Always “pay yourself first” (as was already mentioned). That means that no matter what, you save a certain percentage every week. I used to save 20% from every pay check and by the time that I was in my early 30’s I had about $40,000. I used part of this money as as a guarantee on a loan when starting my first business.

Today I look back and am very thankful for making that very basic, but good financial move at a young age!

  1. Live below your means
  2. Save everything that you can
  3. Be patient and look for a good opportunity.

Oh…and don’t forget to stay in shape so you can live long enough to enjoy the fruits of your work!

Good info so far, thanks a ton guys! As far as taking advantage of my youth subject, I guess I haven’t begun investing much because I’m just not sure about what’s out there and what’s a good idea or not. I realize anything is better than nothing, but do you guys have any specific recommendations? Money market, CDs, stock market? I’m really not sure where to start research for this kind of stuff, but am definitely interested, any help would be greatly appreciated!

nate i hope when my boys are twenty they are as responsible as it sounds you are!! you are way ahead of the game!!!

[quote]Nate Green wrote:
This is in the same vein, but not directly related to debt.

I’m 20 years old, and just last week I took the first of many steps in setting myself up to be financially secure and content.

After reading The Wealthy Barber, I decided to ‘pay myself first.’ Currently, I’m contributing just under 4,000 a year into a Roth IRA, and also have 10% of my monthly income directly deposited into a seperate money market account, until I build a decent foundation.

From there (soon), I’ll be doing some research on various mutual funds and will probably pick quite a few to help diversify a bit.

I think growth/income funds will make up the bulk of my investments (long-term, the returns on some I’m looking at are fantastic with little risk.)

I’m also going to stick some in pure growth funds.

From there, it’s going to be real-estate, and then…

…I guess the sky’s the limit.

I’m just glad I’ve implemented these first steps. As Shugart says: “Shut up, Do stuff.”

-Nate
[/quote]

For now, I would stongly urge you to read up on economics and finance. Get some universtiy texts and read. I say this because I don’t believe in “great return with little risk”. In a semi-efficient market like we’ve (arguabley) got ourselves here, the return is based on the risk. That said, there are smart risks and stupid risks, and the latter will, in the long run, leave you better off than taking no risks at all.

In terms of mutual funds, I don’t see the point in diversifying them. The point of a mutual fund should be to diversify. At this point, you are diversifying your diversification, and that seems bizzare to me, but there may be reasons I just haven’t considered (never have been a big fan of mutual funds, I say just save up the ~$40,000 you need to diversify your portfolio and go it alone).

I’d also be cautious going into real estate. There are a lot of people trying to make a fortune in this now, and I see it as way to volatile. That said, if you mean development, then you are on to something. I feel that North America is going to go through a radical urbanization (I mean a move away from sub-urbia) in the next few decades, and urban development is going to be a big field. At the same time, this would destroy anyone with major investments in sub-urban properties, this is just speculation on my part.

[quote]Aleksandr wrote:
I think some people are simplifying debt too much. You can have “good debt” from purchasing a consumable, if the net present value is greater than that of paying with cash. For example, food is a major expense for most of us. If steak goes on sale at 50% of regular cost, I may buy as much as I can eat and freeze without it going bad. This might mean I have to use a credit card, and now have debt. This is an very simple example, but I think it shows my point.
[/quote]

Wrong. One hundred percent wrong. You never have “good debt” from purchasing a consumable. If you can’t afford it with cash, you have no business buying it. Who cares if there is a sale touting 50% off. So with that logic I need to spend extra money I don’t have to take advantage of that 50% off. Before credit cards, you had no choice but to pay cash for these types of expenses. Now you have to discipline yourself to not get into this game of borrowing from the future to pay for today’s wants (that are disguised as needs).

[quote]ZEB wrote:
The only thing I will had, having had sold cars several years ago. Try not to get anything with high mileage as that can come back to bite you. Try to find a car that is two years old with 30,000 miles or less on it. Also, do some research on the previous owner and find out if the were “hard” miles. If you can buy it directly from the previous owner all the better. You can figure out very quickly how he/she drove the vehicle; city miles vs country miles etc.
[/quote]

Zeb, I agree with you. If the car is 2 years old you should look for 30,000 miles or less. Also agree with the fact of what type of miles were they driving. In my case the car was 4 years old (avg. 15,000 miles per year), the majority of the miles were smooth highway miles, it was a Toyota SUV that will get at least 200,000 miles, and it was meticulously maintained. I ended up low balling the blue book by 2,000 dollars and when our mechanic checked out the car he confirmed that we were getting a high quality car for a steal!

Thanks for clarifying my advice. It was needed in this case.