Debt or Equity for the Future?

Off Topic
1

This ain’t one of those “Does she like my Abs” threads.

As I get older, priorities change, which compels me to look back at some of the biggest mistakes in my life, and maybe help others in the process by displaying them.

In my late 20’s and most of my 30’s I earned a six figure income and was broke all the damn time. Sure, I had a big house, cars, toys etc, but they were ALL financed. I would get a huge paycheck only to find it GONE in a few days paying creditors off on minimum payments.

About the only thing I owned were my furniture and clothing. I was a walking mound of debt. That debt increased through my divorce while we split the existing debt, then I had to start all over and bought all my new stuff (Furniture, kitchen stuff etc)on credit AGAIN.

About the only thing I did right was set some money into my 401K which I kept thru the divorce in order to give up my house. I found myself with not only debt split and new debt, but child support that would be enough to house and feed a family of 6.

In my late 30’s I remarried and scrounged up enough money to get an FHA loan (5% down) for a new house, which I don’t recommend because of the mortgage insurance required.

All in all between my new wife and I we had about 50k of debt on credit cards, personal loans and cars.

We were tired of living like that. We decided to shed all our debt and slowly over time pay it off. Over 5 years we paid off that debt. We only owe on a house now.

Today, I make less, yet have more money to save and spend! What a concept. Today, I spend less than I used to. Today I own my cars and have ZERO on the credit card. I still have a healthy child support payment but it’s manageable. After going through my monthly expenses, I was shocked at all the BS expenses I had like dinners out, energy drinks, cable, etc.

I guess I wanted to create this thread so it may speak to anyone out there who finds themselves in the same boat…spending up to your monthly income. I’m speaking directly to the 20-40 somethings who tend to live to the top of their monthly means, buying cars they can’t afford or cars and houses that are just too much for their true need. I know many of us think in terms of “I can afford 400 a month for that new car” vs, can I BUY it now without going into debt.

I’d like to hear from anyone who is currently having issues with a lurking loan, student loan, or who may be falling into the credit trap and how you are doing with it. How did you get there? Also very interested in anyone else who may have climbed out of the debt pit. Who has made it to goals with their retirement plans?

If you are not thinking about what you will be doing at 60-65, you need to. If I had only set aside 200 a month since I was 25, I could have had about 1.5 million saved in my 401K at retirement(assuming an average of 10% return). As it is now I have had to really up that monthly amount in order to hit my 2-3 Million dollar target because I didn’t get going seriously until recently.

These are real life questions we all should be thinking about. The earlier you start the better.

2

Are you a Dave Ramsey fan? If you’re not, you would love him.

Out of school I racked up $10k on a credit card during the summer before I started working full time. Carried that debt making minimums and living the high life for about a year until I got fed up being broke all the time considering my income was pretty good for my age. Shed the credit card debt, paid off my car, my then girlfriend’s car (now wife), her student loan, and then her car. Now all I have left is about $15k in my student loans which I’m hoping to have paid off by this point next year.

I made some mistakes along the way, actually bought a new car in the middle of all of this and paid that one off a few years early as well. Also, my housing payment is probably more than it should be but all in all, I’m not broke anymore and am putting enough away for retirement and have a solid plan to liquidate my remaining student loans.

The thing people with finance problems need to realize is that developing the discipline to be smart with your money is difficult, but once it’s done you will actually be happier. Sure, you won’t have all that crap and you won’t get the rush of buying something, but life is much less stressful and quality of life actually increases.

Book recommendations: The Total Money Makeover by Dave Ramsey and The Millionaire Next Door by Thomas Stanley - both very eye opening and combined will certainly change anyone’s view of personal finances.

Good thread, I love discussing personal finances.

3

Yeah, Ramsey’s the man! Lanky it seems you have a good plan for the future. I do have his the total money makeover book I have read. This is such and important topic for men, but …

I’m not planning for SS to be around.

4

I’m going to avoid sharing any stories since I’m not sure where to stop.

But a few things I’ve learned over the years for myself:

  • switched every payment to cash, and canceled all credit cards – I know exactly how much I do or don’t have at any given moment, and it forces me to make the hard choices sooner rather than later. There are some people who can responsibly use credit cards and take advantage of rewards programs… but I wasn’t one of them.

  • got out of living paycheck-to-paycheck as soon as possible (mostly by living as cheaply as possible, saving money and not taking on any new debt)

  • keep/kept a handful of different reserves with varying amounts of liquidity; I know what I can withdraw/sell when and with what penalties and in what timeframe, and then shift things around as necessary. Sometimes things go south, so I have a good idea of what I’m willing to do when and how to do it.

  • for awhile I used 3 staggered auto-renewing 90 day CDs as my 3 month “emergency fund”. If I withdrew before 45 days I forfeited the first 45 days of interest; if I withdrew after the 45 days, I kept the first 45 days of interest but forfeited the rest. No other costs for early withdrawal. It was a good deal when 90 day CDs actually made more than .000nothing%.

  • focused on net worth rather than assets or liabilities/debt; made this positive as quickly as possible, then started growing it. It took me several years to switch focus like this though. For a long time I could never make up my mind whether it was better to save, to invest, or pay debt, and I flip-flopped regularly.

  • this also meant a shift to looking at percentages more than absolute values. For example, I can pay off my student loans today, but putting that money toward my 401K is a better choice, since the yields are higher than my student loan interest rate. So… basically… if given two places to put my money (beyond basic living and luxury expenses), put it toward the one that impacts my net worth the most.

  • be very wary taking on any new debt, and only do it if you can make it make sense.

I actually financed my current car (after owning the last two outright), because it was something of an arbitrage opportunity. Someone got in over their head, and traded it in at a dealership at a significant loss. Because of the dealership’s location, they were having trouble moving it. With some negotiation, I was able to buy it for below average market value, but the dealership still made a enough profit for them to justify it.

Between the impact on my net worth and the loan terms, it actually made sense.

  • hold off buying things as long as possible, but always buy quality. If I find something I want, product-wise, I’ll usually sit on it for several months before actually buying it. This also gives plenty of time to shop around, since a good product at a lower price is still a good product. (And I make sure that it’s something I “really” want, rather than something transient.)

But probably the most important, significant change I made of all of those…

  • Once it was positive, I set a minimum annual rate to grow my net worth, percentage-wise. I then broke it down into quarterly goals (not monthly). That gives me 3 months to figure out how to make sure I hit that designated percentage. Some months might be up, and some down, sometimes I might focus on paying off debt, or cutting costs, or investing, but the end result is the net worth goes up by a certain rate every quarter.

One of the great things about this is it keeps a lot of things in line, and helps build good habits as far basic daily financial decisions. If I’m on track toward hitting my goals, sure, I might get energy drinks or Starbucks regularly, but if not, it means buying locally-roasted beans and grinding and brewing my own coffee (horrible trade off, I know).

But seriously, it makes it really clear when I can and can’t splurge, and switches the focus toward getting good value for my dollar. Do I get more value out of eating out a couple times a week, or do I get more value out of driving to spend a weekend with a good friend? Stuff like that. And there’s all sorts of quality ways to spend time that don’t cost much money.

Another major aspect of that is that it gets harder every quarter, which forces me to get increasingly creative. Simple stuff like “stop eating out” works in the beginning, but that’s not enough after a couple years. But since it slowly creeps up on me, I don’t need to do everything all at once. Eventually, working my current job and investing in my current investments won’t be enough, and I’ll have to either find more/better investments or look into other ways to use my assets. I still have some time before I need to really make the next steps.

And like with many things in life, making sure I at least hit a certain minimum keeps me always moving forward, rather than making excuses for why I didn’t hit my goals and “accidentally” stagnating or regressing.

I still wrote more than I wanted.

Also, for what it’s worth, a lot of my early reading was Kiyosaki’s stuff. Rich Dad/Poor Dad and The Cashflow Quadrant were the most inflluential, followed with some actual finance and investing books later on. I’ve not read anything by Ramsey.

5

That’s some good shit there Lo. I’m strictly a cash person now too.

6

Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.
7

[quote]Dr. Pangloss wrote:
Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.

[/quote]

Right, a new car purchase with cash is even bad. A new car purchase under financing is worse. Rather a 2 year lease return purchase with cash is the best bet.

8

[quote]Rockscar wrote:

[quote]Dr. Pangloss wrote:
Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.

[/quote]

Right, a new car purchase with cash is even bad. A new car purchase under financing is worse. Rather a 2 year lease return purchase with cash is the best bet. [/quote]

A “new car” anything is bad.

Purchase a 3 year old car and let someone else take the significant depreciation hit.

9

[quote]Rockscar wrote:

[quote]Dr. Pangloss wrote:
Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.

[/quote]

Right, a new car purchase with cash is even bad. A new car purchase under financing is worse. Rather a 2 year lease return purchase with cash is the best bet. [/quote]

Well, lets say someone made some money off the books.

Would the interest on the car loan be as bad as the taxes that someone would have to pay on his income?

10

[quote]orion wrote:

[quote]Rockscar wrote:

[quote]Dr. Pangloss wrote:
Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.

[/quote]

Right, a new car purchase with cash is even bad. A new car purchase under financing is worse. Rather a 2 year lease return purchase with cash is the best bet. [/quote]

Well, lets say someone made some money off the books.

Would the interest on the car loan be as bad as the taxes that someone would have to pay on his income?[/quote]

I would not purchase a titled asset using money made off the books. Furthermore, if the amount is more than $10,000 the car dealer will need to file a Form 8300.

11

[quote]Dr. Pangloss wrote:

[quote]orion wrote:

[quote]Rockscar wrote:

[quote]Dr. Pangloss wrote:
Lot’s of great info above. I would just add, “never borrow to purchase a depreciating asset”.*

  • unless you’re using the asset to make a living.

[/quote]

Right, a new car purchase with cash is even bad. A new car purchase under financing is worse. Rather a 2 year lease return purchase with cash is the best bet. [/quote]

Well, lets say someone made some money off the books.

Would the interest on the car loan be as bad as the taxes that someone would have to pay on his income?[/quote]

I would not purchase a titled asset using money made off the books. Furthermore, if the amount is more than $10,000 the car dealer will need to file a Form 8300.
[/quote]

Even if its leased or financed?

For in Austria that is not so.

There are enough loons out there basically working for a car, why not be one of them?

12

I would want to make sure I had some kind of declared income, lest the IRS wonder how you can afford your rent, car payment, and trackable expenses on little or no income.

13

GREAT THREAD IDEA

I can’t say I’ve made mistakes really but heres what I’ve done;

sept 2012 - Started professional career in septermber 2012 with $600 to my name.
Started saving for a house IMMEDIATELY
Jan 2013 - Traded in the old camry (the heat didn’t work and my toes were numb on my way to work) and bought a 2006 Mazda6 with 103k miles for $8500 making $240/mo payments for 3yrs @4.3%. I’ve read that if you can’t pay a car off in 3 yrs, you can’t afford it.
April 2013 - Bought a house, payments are $960/mo which I probably couldn’t rent a decent apt for
Summer 2013 - I had an overhanging balance of about $2k-$3k on my credit card, buying/fixing things around my house that NEEDED to be done.
October 2013 - Made sure I was able to pay my credit card off at this point since this is when the 23% interest rate would kick in
March 2014 - WAKE UP CALL - Hit a pothole with my car, 2 bent rims, 2 flat tires. I realized I didn’t even have money in the bank to take care of the $1100 in repairs. I was in the process of spending money on my in-home gym that was going to save me about $80-$100/mo. In the end Insurance paid for $750 and I paid $350.

I wasn’t and never really am living too extravagantly.

CRAIGSLIST!
I got a nice table saw with a new blade for $40 the other week. I am typing on a 2009 Macbook that I got for $260 with a bunch of software. I did some landscaping around the house with FREE lava rock.

Cable/Internet
My GF pays the internet/cable bill of $63/mo. I don’t need cable (we got a roku to watch TV on) so we just have basic channels, but I do pretty much need internet. You can ALWAYS call the provider and threaten to quit if they don’t given you a better price. We (I) pretty much have to do this every 6mo.

Something I have realized, at least for myself, is knowing whats important TO ME. Leather/sunnroof was important in the car I got, but I didn’t need a new car, so I found a way to satisfy what I LIKE, and save money at the same time. I focus on power lifting, so just a power rack bar/weights was enough to get my home gym started, so I could save on any really expensive equipment. I wanted an apple computer, but don’t have $2k to spend, so I got a used macbook.

Going for a walk with the GF is cheaper than a movie. Obviously avoid bars, or at least getting tipsy at home before you go. And you have to have appreciation for those days where you just don’t spend a dime.

14

[quote]Dr. Pangloss wrote:
I would want to make sure I had some kind of declared income, lest the IRS wonder how you can afford your rent, car payment, and trackable expenses on little or no income.[/quote]

Well, thats obvious.

What else would deduct the interest rates from?

15

Something I’m working on now is having 6 months emergency savings of monthly expenses in the bank and ready to go for emergencies. I have about 4 Months right now. I’ve been laid off work before and many people don’t have this cushion. in 2010 I did not have this. just maybe 2 months severance. Unemployment barely takes care of food and utilities. Once I have that 6 months I will be socking more into the 401k.

Next move is when the kids turn 18, selling the house and taking the equity for a 60 or so percent down on my next house which will be a downgrade from a 4/3 to 3/2 home in the hills with acreage. Hoping for a 15 year loan to pay off early.

16

[quote]orion wrote:

[quote]Dr. Pangloss wrote:
I would want to make sure I had some kind of declared income, lest the IRS wonder how you can afford your rent, car payment, and trackable expenses on little or no income.[/quote]

Well, thats obvious.

What else would deduct the interest rates from?[/quote]

Do you mean deduct, in the sense of taxable income? Because in the States auto interest is not tax deductible.

17

[quote]Dr. Pangloss wrote:

[quote]orion wrote:

[quote]Dr. Pangloss wrote:
I would want to make sure I had some kind of declared income, lest the IRS wonder how you can afford your rent, car payment, and trackable expenses on little or no income.[/quote]

Well, thats obvious.

What else would deduct the interest rates from?[/quote]

Do you mean deduct, in the sense of taxable income? Because in the States auto interest is not tax deductible.
[/quote]

Not even if it is mainly used for business?

I can write of 80% of the car too? (Cause every now and then I will use it for none business purposes)

And gas and maintenance.

18

If you use it for business, not simply commuting.

Again though, the IRS would like to know why you’re writing off car interest expense when you have no or little taxable income.

19

[quote]Dr. Pangloss wrote:
If you use it for business, not simply commuting.

Again though, the IRS would like to know why you’re writing off car interest expense when you have no or little taxable income.[/quote]

Lies!

I have plenty of taxable income and just because my friend might have some income off the books…

In fact if my friend had plenty of taxable income too, think of the possibilities.

You know, high tax country, I know guys who make 1800 EUR (after taxes) officially and about twice the amount unofficially as car mechanics.

If an offical car mechanic hour costs 100 EUR they can demand 50 EUR an hour and people will thank them for it.

Turns out, with the 10+ hours each week and the rather negligeable markup on the spare parts they use they make twice as much as they do working 9-5 (over here, 8-4 really, but,well…)…

One of the hints that karma is real, the more you tax the ones who can actually do shit, the more lucrative it is for them to do it off the record.

20

I’m fortunate to have been with a big company for many years and if it was offered, I took it. Stock options, IRA, whatever. We were even an ESOP (employee stock ownership plan) for a while and when that was spun off, they settled with us. So, take whatever is offered. I started with the base IRA 6% contribution and every time I got a raise, I bumped it up.

Credit card debt sucks and easy to get into. It happened to me a couple of times when I was working on the house or unexpected car problems came up. But each time, we paid it down. Now I owe a little on my Macys card and less than $5k on one credit card, which I pay between $300 and $500 per month on.

I use my debit card for all my shopping during the week and my online buying. I have a few things like the newspaper, EZ-Pass and my gym membership come out of it. I buy gas with cash only. $100 in cash usually gets me through my week.

So anyone starting out, if you’re not offered an IRA or life insurance at work, go get it through a broker. Most big insurance companies have financial services and the deductions can be made electronically. Just figure on something that can ride for 30 + years.

My only big debt is my mortgage, even my late wife says it probably wasn’t the best thing to do but it enabled the kids to go to college and we made improvements to the house. My long-range plan is to stay in the house another 5-7 years and head for a warmer climate. I’ll have more equity in it by then.