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So the authentic advice is, live within your means, except when it's smart to borrow. "Live within your means' is a good suggestion but it has no economic foundation," says Lusardi. "Maybe this advice is what it takes for people to do the right thing. But let's not be judgmental about what people do."
Laura Lusardi is author of the book "Money & Happiness" and blog of the same name.
Wise advice. Regardless of what we were taught (OWE NO MAN ANYTHING!!!, THE BORROWER IS SLAVE TO THE LENDER!!, ETC., ETC.), I have believed for years that there is no adequate "one size fits all" policy concerning debt. Now that I am debt free I can speak from experience on both sides of the issue. I had plenty of debt when I was in a growning stage but it was manageable. For example when I owned multiple rental houses,it was a wise use of leverage to have those mortgages which turned out to be profitable later on. Rent paid the debt even if the houses never escalated in value (which they did). Renters paid off those houses for me, thank you very much. If I was forced to pay cash I would have never been able to expand.
The same could be true of a college student who might borrow so she can get an education that will benefit her down the road. And there are lifes emergencies that come up unexpectedley in which borrowing may be the best course of action at that time.
Generally I believe most consumer debt is not good or necessary. And yes, I believe most people need to live within their income level period. But to make a doctrine out of it and condemn or punish anyone who borrows is shallow thinking. I believe the better course of action is to teach financial responsibility and trust people to make their own decisions and stay out of their business.
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I think you need to pray about financial situations. If you get a green light, borrow. Our Father owns the cattle on a thousand hills!
I don't delve in real estate, but I invest in REITs that pay 18-20% annual returns (NASDAQ: AGNC). Someday, I might invest in a couple of two-unit apartment buildings, as the rent from one pays for the mortgage, and the other is profit. When I sell my '65 Mustang Convertible, which I bought new, I may use the proceeds to put a down on the units.
I think that one must consider one's risk tolerance. If I can be in an investment with high returns, my risk is greater than being in a low-return investment. Consider AWF (NYSE). they pay a constant 10 cents/mo per share (share price @ $15). I have owned them for over 20 years. They compound monthly. Set up a DRIP account, and realize a return of 8 % per year. (To figure out your return on any stock, enter their annual dividend in dollars and cents with no decimal point, divided by their share price, with decimal points. So, a $15 stock that pays $1.20/year returns eight percent (120/15=8%.). Remember, it compounds every month, so your return would be greater than that.
As far as AGNC and others like it, their returns are guaranteed by the Federal government. Their principle and interest are assured, so you will make money. That should go on until the housing market is fully solvent. It beats painting and cutting grass.
If you're not very risk-tolerant, buy blue chips like GE and AT&T. Johnson & Johnson is excellent and very safe. But, their returns are lower. You can buy 100 shares of a good company and learn about options -- puts and calls -- to enhance your income.
Today, savings accounts are a waste of time, paying nothing. Money Market accounts are next to nothing (1% at most). You'd be better to pay down your mortgage or car loan, thereby paying yourself 4-8%.When rates go back up, your debt will be reduced.
Money is a commodity; a means of exchange. Use it, rather than being a slave to it. Remember, if you are completely out of debt, you have no credit. Without a credit rating, you have no borrowing power, whatsoever. Personally, I use credit to my advantage. My wife and I use a cash-back American Express care to charge our daily expenses (about $2400/mo.). The interest is 19%, but we pay nothing, as we pay it off every month. We get $500 back every year. I have a "project" Master Card, which costs 0% interest for 18 months. I invest at a 20% return and pay that off before interest is incurred.
My first priority is abundant sharing. I set that aside with every transaction in investing and in my business. I relish God's blessing on me.
I do not take this scenario to the point of gambling on lottery tickets, horse races or other games of chance. That, to me, is not business or investing, but temptation of the Devil. I eat the meat I want, but I allow you to do the same.
Happy investing!
would Jesus, being a Jew, live in FL?
Depends on How He feels about bugs 'n' gators, Mike. : ) I'm sure He'd be a "snowbird" though - lotsa sinners down there in June. : )
Excellent discussion and thoughtful points all around. Thanks.
John, I have to agree with you about the housing situation in the country right now. The foreclosure wave is not done and it does not appear that housing prices have reached a bottom generally (though that may be a different situation in other areas of the country). It certainly is a good time to be out of debt from one poit of view - but with rates as low as they are strategic debt (I like that phrase) can also make sense. There is a lot that has been said and written about the housing market and the bubble that occured. There is plenty of blame to go around as you say by both borrower and lenders (and tax policies that also made the speculation profitable - but we perhaps don't want to go there in this thread). I believe that the OT laid out parameters for being a lender so it would be difficult to say it is "off the Word".
On another note (the "WWJD" note) - would Jesus, being a Jew, live in FL? Just kidding of course!
What would Jesus have done? Hmmmm. I think he would have definetly been a renter down here and waited until he inherited a mansion above.
I think we are about ready to see another wave of people walking away and leaving banks with still more real estate which they do not want. I wish there were better news. I am not sure houses will ever get back to those pre-bubble days. Just like certain stocks have never reached the highs that existed in the dot com era (frenzy). Some of the companies are perfectly healthy and prosperous.....but their stock price is still low. House prices became an unrealistic fantasy fueld by speculation and greed on the part of BOTH borrower and lender.
I think it is a good time to be out of debt. I am for the first time in decades. But the debt I held was strategic. When it no longer made sense I paid things off. I was able to be debt free all along the trail but I decided to purposely stay in debt back then when things were different.
Some people believe it is wrong (off the word) to have a penny of debt and the level of participation in their ministry is limited by your adherence to such doctrine. It is their right to believe and practice that.
But I wonder.....would they say it is "off the word" to be a lender"? I am in the position of being able to be a lender and I almost did last year. My good neighbor and I almost loaned a professional couple money for land they wanted to buy to build a house on. Our interest was going to be 9% with a 5 year baloon secured by the lakefront property. It was tempting but we passed. They found another lender.
Are lenders bad because they provide people a way to be "off the word" ?? I say and agree with Mike that it is a case by case situation. Some bad some good. No sweeping dogma that I see is a "one size fits all" situation.
John's question: Is it morally and biblically wrong to walk away from a house that is underwater? For example if a couple bought a home for $200,000 in 2007 and it is now worth $100,000 is it "sin" to hand back the keys to the lender? My opinion....it is absolutely not. In fact I think in some situations it could be the wisest thing to do. Stewardship?
There are also situations where it would be morally wrong to walk away. For the most part (and JohnI think you would agree) that for the most part situations and circumstances all need to be evaluated on an individual basis rather than using a "one size fits all" approach.
John, Near as I can tell, a mortgage is little more than a glorified I.O.U. with certain conditions...In real estate terms, neither side, the debtor or the debtee, can make or force the other side to do anything....All either side can do is provide stipulations, or consequences, in the event the other side fails to meet the obligations of the agreement...
Lets say, I borrow $500 from you and in return give you a simple I.O.U.with no stipulations..So you keep calling me saying "where's my damn money?" and I keep answering "I ain't got it"...Well now what?...We're both stupid and got what we deserved and probably won't be friends much longer but I guess I'd be $500.00 ahead...
Banks and lenders and such, being much more adept than you or I would be in the lending process, provide conditions and courses of action to take when things do not go according to the primary plan....You get charged late payment fees if you're late on a payment....You may even be charged a penalty if you pay the house off early....If you quit paying the house payments altogether, you have already agreed to cede the house back to the bank...
Now, let's go back to the $500 I.O.U. that I gave you...Had we written on the I.O.U. that I must pay you in full by June 1st or you get to have my beanie baby collection, and on June 1st I show up at your house with my beanie baby collection and say "sorry, John, I'm still broke, enjoy your beanie babies", would you have any reason to be mad, or to say that I didn't fulfill my end of our agreement?...I think not...
When you sign a mortgage, you agree to two major items...
1) Make the payments.
2) If you don't make the payments, the bank gets to have the house.
Either way, you're fulfilling you're agreement...The lender may not like it, especially if the value is 50% less, but the worth of the property is irrelevant...If the value of the property was doubled and you couldn't make the payments, you would have the option of selling and paying off the debt, or simply walk away....IMHO, banks should also share in the accountability in the risks of borrowing and lending...
Good timing Michael. I think now is an AWESOME time to by a house, better than it has been for decades. A true BUYERS market. Here in Florida you can get houses 50% off their highs, practically brand new. We are back to the old day of home ownership being .....well...your home. NOT an investment. Housing as an investment is a NO, NO these days. It is NOT a good investment (with exceptions). It is a good purchase though right now at least. Bargain prices.
The whole country learned the hard way that houses can indeed go DOWN in value. Just like a stock. Surprise......! Shock and aww! In my uneducated opinion, the infamous housing BUBBLE is NOT done bursting yet. Still hard times ahead. Many have held on for years hoping and (beliveing??praying??) that their underwater house would begin to correct. The "hangers on" are also now beginning to walk away from their underwater mortgage.......wouldn't you? Heck yeah....I would (if I were underwater by very much.)
That poses another question. Is it morally and biblically wrong to walk away from a house that is underwater? For example if a couple bought a home for $200,000 in 2007 and it is now worth $100,000 is it "sin" to hand back the keys to the lender? My opinion....it is absolutely not. In fact I think in some situations it could be the wisest thing to do. Stewardship?
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