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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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John,
Your words to me are kind. Thank you.
Just to set the record straight, I paid only pennies for Fannie Mae; just on spec.
Another consideration is annuities. I'd like to gather a hundred grand and buy them for lifetime income. Insurance products have their place, and they're tax free.
Have yourself one awesome day, and a joyous 4th! God bless, Brother.
(We can slip in a little digression between comments I suppose. Hard to resist. Take your profits in AIG and be glad you made some. All the financials are on a downward trend. Look at AIG stock price over the past year. You got lucky. Cash in. Fannie Mae? They are broken as I see it. You can do much better elsewhere. I owned them for over 10 years and made $35k over time on them. Sold them in 2007, so have followed them. Things have changed)
You give great words of wisdom about godly matters, which are most important in the greater scheme of things.
"When I am bogged down in debt, the first thing to do is give."
"Take charge of your finances and use debt to your advantage. Good debt is debt you can pay back before it takes control of you life. Bad debt is ongoing obligation that holds you down, obligated to men, with little hope of getting out from under their repression."
Awesome! You should still be in an advisory position for "you know where" in my opinion.
John,
First of all, please accept my apologies for diverting from the topic at hand. Good debt vs bad debt is a worthy consideration. I think that purposeful debt to an institution is much different than being indebted to an individual, because that person is hurt, personally, if you renege. Debt, to me, is a leverage. My risk tolerance is high enough to borrow money to buy stock. I buy things like Fannie Mae and AIG, because they're "too big to fail." If the Federal government won't let them fail...count me in! (My AIG stock is up 191%.)
It used to be said that "good debt" was a house mortgage, and "bad debt" was credit cards. That still may be true. This housing fiasco is cyclical. It won't be this way forever, as the stock market won't be this volatile too much longer--until the pendulum swings back here again, some day. Change is what we're always in for. That's why the gurus cry for diversity in our holdings. But, I'd rather play this game on the cusp. It's exciting. In financial matters, the best thing is to have a great credit score. "Bad debt" is anything that deters from that; conversely, "good debt" is anything that promotes and helps that.
If you have credit card debt, be faithful, and pay on time and get rid of that debt.Do it first, as it's detrimental to your credit score. If you have no credit, apply for a Sears card, buy something with it (cheap), and pay it off, immediately. Do that for three months and you'll raise your credit score.
Once your credit score is raised, you'll get offers for credit cards with 0% interest for a year or more, on purchases (e.g., CITI). Pay it all off before the low rate expires. Be disciplined. Take charge of your finances and use debt to your advantage. Good debt is debt you can pay back before it takes control of you life. Bad debt is ongoing obligation that holds you down, obligated to men, with little hope of getting out from under their repression.
My main desire is to be able to profit and abundantly share. I need God's blessing in my entire life. I pray to our Father for direction in my financial life. I expect answers as to the approach I will take. I give him the first fruits and of the increase. It is my blessing to do so. When I am bogged down in debt, the first thing to do is give. That's the key to prosperity. (If you're sick, find someone to minister to. Deliver them. You'll get your desired results!)
Stick to Romans through Thessalonians as to what's written TO you. God bless each and every one. He's coming back!
Its a tough market (as it shoudl be). The days of easy stock gains are over. I miss the 80's when you could pick a mutual fund and expect 15% or better a year. And buy just about any tech stock and ride it to real good profits. I like to say that Cisco and Microsoft paid for our house. But look at them today. Great companies with good profits but but stagnant stock prices. Interesting. A person can no longer buy one and forget it. It takes more vigilance and watchfulness today than it used to.
We digress...into investing. I may start another blog about that someday. Problem is most people have no money to invest.
This topic was originally about whether debt is right or wrong. I think the conclusion seems to be it can be either, depending on the situation. I find it simple to conclude from common sense alone.
Others who hold a hard line stance otherwise (ALL DEBT IS WRONG AND SIN, PERIOD) are puzzling to my brain. Maybe they have an unterior motive to make that declaration. You see, if I am bogged down in debt then I dont have as much money as I could have to give to the church. And therefore they will I will not get blessed as much as I should. I cant give my tithe to its fullest. Hmmmmm. Just a thought.
John,
I think we're on the same page in our financial attitudes. One thing about REITs and Mutual Funds I like is that they are required by law to pay out at least 90% of their profits every year to shareholders, in exchange for not having to pay Federal income taxes. But, most mutual funds are way over managed, charge too high a fee (except Vanguard Funds), and incur too much taxable activity by so many trades. Index Funds have very low management expense and trade much less often, by definition.
Annaly Capital (NLY) is a good one, but, so, too, is their other company, Chimera (CIM) trading at $3.40, because 100 shares costs only $340 instead of $1740, and the yields are a little higher. But, unfortunately, both those stocks had an ex-dividend date of yesterday (June 28th).
Regarding kids and finances, I think you're right about no one getting into carrying cold, hard cash. But, to teach a young person about money and budgeting, I suppose the best approach is to give them a debit cart with a cap. Fund it so much a week/month and monitor it with them until they handle it properly. Finances should be taught in school, but I think that it would be best to do so in high school. At least, how to balance a check book (on-line banking) and renting vs. buying, budgeting (living w/i one's means), debt, savings and compound interest. More advanced college offerings in finances would be appropriate.
When one invests in stocks, it's best to buy low and sell high (e.g., GE $8 rising to $18). But, since the market is a system of the world, we know who is lurking in the shadows. So, to purchase a block (multiples of 100 shares) allows the investor to cover his bet, by selling a covered call and purchasing a put to protect the investment from dropping. Farmers do that to cover themselves, if their crops fail. Thus, they get paid either way. Especially important if one is approaching retirement, when one cannot afford to have an investment drop 50% just when the money is needed. With a put, one would collect much sooner. Otherwise, one needing to live on this money better get out of the stock market and go for bonds.
Hi Joe. Always good to see you. Glad you like my picture I found of our Lucius. I will never forget him. Good memories of our WOW year in Erie and we were on Way Builders too. Miss him sometimes.
Man! They must have had a severe depression in that biblical account you refer to. I bet their leader would have been overthrown for sure if they would have had FaceBook and Twitter back then. I think I would prefer ass head to doves dung any time. Tastes like chicken you know. Don't ask me how I know. Let's just say I grew up in KY in the sticks and leave it at that.
Jerry, I like Annaly Capital Symbol NLY with their almost 14% yield. I am preparing to buy some. I'll have to look into AGNC. Not sure how they can continue to promise on that high yield. Wow! That mutual fund AWF looks nice too.
I believe there are no more "Blue Chips" today. I agree with some today who say that term is outdated. Some blue chips of yesteryear are gone today. Look what happened with GM, US Steel and others. I have owned and followed GE for years. Didn't do much. Kind of slowly grew....glad I sold it in the high $40's in 2007 when things went down. It went down as low as $8 a share. I jumped back in at that level. It is now about $18. Nice 3.3% yield. Even with so called Blue Chips there is no gaurantee. It takes watchfulness. When to sell is as important as when to buy.
We have always paid off our credit cards when the statement comes in. We have never paid a penny of interest. Just our choice. But even with that disciplined method there is still something about plastic that I believe makes one spend easier that if he carries cold hard cash. I think this is especially true of youth. I think it is a good idea to teach our young people to use real cash instead of the plastic when possible. Doubt it will happen though.
Speaking of youth. In my opinion they do not teach basic sound financial principles to young people today in colleges. Kids are educated in all manner of other subjects. But I believe it would be valuable to teach mandatory classes on debt, savings, compund interest, retirement, home ownership vs renting, online banking, living within your means, etc, etc. They might provide video footage from Dave Ramsey and Suzie Ormans shows as examples. I believe it is true that a leading cause of divorce is still due to financial issues.
Well, Jerry, I may invest in pork bellies, with the price of bacon exceeding the cost of an ass's head or a third of a cob of dove's dung....
You exemplify somebody who uses credit cards, yet still lives within your means, as you pay off the principle every month...Unfortunately, many people are not in the same boat...When people borrow from a lender, the lender usually has a plan A, B, C, D, and so on to ensure that they get repaid...Most borrowers never even think through to a plan B...By the time they've run up a sizeable credit card balance, the items they charged are nearly worthless---the meals have been eaten, the cars have been rented, the hotels slept in and the household items are used and worth half or less---there's no way to liquidate the debt into cash...Often, people get into trouble with debt because they leave themselves no outlet to relieve the debt in the event of unforeseen consequences...
One of the things that contributed to the housing insanity, John, was that money was easy and cheap to obtain, which naturally (or rather, in this case, unnaturally) inflates the price of the homes...That house that sold for $390,000 in 2006 was unnaturally priced at that time, due to an overabundance of qualified (or in this case again, rather, unqualified) buyers who had tons of cheap, easy money at their disposal...With little or no down payments required, the good faith and buyers earnest was essentially removed from the transactions---buyers literally had nothing to lose when purchasing an overpriced home that they were under-qualified for...Banks lost their leverage---their plan B,C,and D was taken away from them when housing prices plummeted---hence the bailout...
Regarding the "sin" of borrowing---I'm not going to touch that...However, I will mention that I lasted longer as a member of the Way Credit Union than I did as a member of the Way International....I was also a Catholic when it was a sin to eat meat on Friday and when it wasn't...
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