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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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Debt can be a very useful financial tool when it is used purposefully and the examples that have been given (to buy a business, to buy rental properties, to buy your own home) are good examples of that. Using debt to finance a lifestyle or using debt to finance ongoing obligations is almost always not good. I come into contact everyday with people that have done both and their longer term results are dramatically different.
I am really glad to be able to make a comment in this discussion with you three (John, Michael and Les).
Bless you guys.
great discussion...... was reading some Bishop Pillai today. He was talking about the nether millstone, that there was an upper stone and a lower stone pegged together, and the upper stone if pawned, had to be returned to the owner at harvest time.
Good points.
"We are bought with a price, higher than any man can afford, are we not already in debt?" Love it.
And Les I agree, there is a major difference between servant and slave. Of course, we were taught it was SLAVE.
I am a fan of both Suzie Orman's and Dave Ramsey's financial principles. Both encourage one to save and be debt free. It feels good to live that way.
But I bet both would agree that manageable debt is fine if there is a good purpose for it. I doubt either would say it is sin or wrong 100% of the time.
I know of situations where the couple was told that debt was "off the word" and therefore they should sell their house because they had a mortgage. They ended up renting a place that was as much as their mortgage. Isn't rent a form of debt? Did they not trade a good debt for a bad one? What was the better stewardship? I think the answer is simple.
I say sometimes a mortgage is wrong and sometimes it is right. DEPENDS ON THE SITUATION.
Proverbs 22:7 The rich ruleth over the poor, and the borrower is servant to the lender.
This verse is used by many to teach not to borrow. When I read this verse, I see it as a proverb, a fact of life, a wise statement. I understand that this is not addressed to me but is for my learning. Reading through the Old Testament and the law, I see how God prospered Israel. He provided for their every need. They did not need to borrow because He gave them a land of plenty.
Deuteronomy 28:12 The Lord shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand; and thou shalt lend unto many nations, and thou shalt not borrow.
But God also set up a year of release after 7 years for those who did borrow.
Proverbs 22:7 states that the borrower is servant to the lender. I don't like how it has been changed to say that a borrower is a slave to the lender. The Hebrew word for servant here is translated 716 times as servant. When it is changed to slave it makes it sound more severe. Also the word for borrower and lender are the same Hebrew word that means joined or bound together.
When I was 19, I borrowed money for a car. At that time, I felt chained to my job rather to the lender because I knew if I quit my job, I would loose the car. When I got a mortgage on a house, it was with Wells Fargo. They were so nice to me. They acted as my servant rather than treating me as a slave.
Is it sin to have debt or not?
We as a country are over 14.3 trillion down right now, And I see very little virtue in continuing down the same pathway.
I know it was bonds that built the interstate system. paid back by the federal and state gas taxs. All the little phone exchanges, the rural power companies, all bulilt by bonds, or public debt. I see no other way to build the practicals of a civil society.
Even the space race, or the race to the moon, was an enterprise of deficit financing, yet without it, our society could not or would not be as far advanced as it is.
How does a young man who dreams of farming, or being a contractor, or owing a shop, or any part of comeptative commerce in this country today, without borrowing. It cannot be done.
We are bought with a price, higher than any man can afford, are we not already in debt?
I know when I owned and ran a crane service, that my pickup was paid off 3 or 4 different times, only to be used a collatural for a transmission, or to pay taxes. My liability insurance was about 10 grand a year, and even that was financed. My first crane was 39,000, my last one was 150,000. I just do not see how a person gets into the game without debt. What I see happening, is those that are in the game, whatever field, are getting bigger, and those that want to get in the game, it becoming more difficult as time passes. Part of the grace for myself was I had the same banker when I had the crane service as when I had my window cleaning business. He really stood with me. They also helped us with our home, but ironically I financing cranes before I was financing homes.
Hello again Les. That's so true about banks. They are so illogical. Having been self employed also for decades we saw the same thing. They hesitate to give self employed folks credit as easily as they do for someone with a "steady" job. Put it this way.....I would not buy stock in any bank at this time including Bank of America and Citigroup and Wells Fargo. All the financials are in sad shape right now. They are too big and some need to fail.
Sure its best to pay cash. Or is it......? I say not always. I say there are situations where is it a better stewardship of the "talents" (to use a biblical term) to borrow than to pay cash.
One example that comes to mind.....suppose you had opportunity to buy a business (that you knew well) for $500,000 that would pay you $75,000 a year with potential to grow the business. But suppose you only had $100,000 to put down? You should borrow the other $400,000 at a reasonable rate and buy that business or you could be passing on a good opportunity.
Those kinds of stories have been the beginnings of very wealthy companies if you read their history.
Yet there are those who say that ALL (without any exception whatsoever) debt is not only wrong but it sin.
I respectfully disagree. In fact I think it is not good stewardship to be so shallow minded. As with so many other things I believe it is a case by case decision as to whether it is right or wrong. But the shallow minded among us do not want to do the hard work or hard thinking of each case before passing judgement. It's much easier for them to make a "declaration from the heavens" that is supposed to fit all situations. It doesn't.
By the way, if I were a bank I would give you credit simply because you have the best name in window cleaning that I have ever seen....."Pay Les Window Cleaning". Love it.
About 25 years ago, I got tired of living in apartments and having them raise the rent every 6 months. So I decided to buy a house. It did not take long to find out that I did not qualify for a loan because I was self employed and did not make enough money. I decided to believe God and to pay cash for a house. Most people said no way but I made up my mind and applied the principle that confession of belief yields receipt of confession. I confessed prosperity and that I would buy a house with cash. I forget how long it took, maybe 2 to 3 years, but I bought a house and paid cash. A few years later, Rachel and I got married and we decided to buy a brand new house. Even though I owned 5 houses and a duplex by that time - no debt - I still could not get approved for a loan. Fortunately, Rachel had a real job and qualified with no problem.
Last year, we sold that house and made a profit (not counting all of the interest we paid). We started looking for a new house and wouldn't you know it. Even though I had money from the sale of our house and still owned the 5 rent houses and have been in business for over 30 years, I still did not qualify for a loan. Once again, Rachel qualified with no problem. ( I tried to qualify because I have an excellent credit rating while Rachel's isn't so good - too many kids.)
We found a beautiful house and should close in 2 weeks. The funny part is that we are both 57 and will probably only work another 5 years or so. It is a 30 year loan, so we will be 87 when we pay it off, yet they are basing our credit on Rachel's income. No wonder these banks are in trouble.
I grew up in a small town. everyone knew everyones business. There were girls I could not date, because of my last name. My Grandpa and his brothers were thrown out of a dance, for throwing a squirt bottle in Lawerence Welk's tuba players tuba. This was a while ago.
Norm was born lived, married, and died in the same house. Spent over 40 years as the county auditor. I ran around with his two sons, and we did our best to out do my Grandpa and his brothers. When he was about 75, and had about three heart attacks, and had to sleep sitting up, I stopped to see him. This man had never borrowed a dime in his life. Not for car, home, college, and he raised 6 kids, and three of them went to college on his savings. My dad, my grandpa had been in the construction business, and we were friends with the other construxtion families in the county. all 5 or 6 of us. Well, Cal who at any one time in the 60'or 70's owned 25 trucks, and all the multiple equipment needed for a gravel operation. As Norm and I talked, he talked of the regrets of his life, not taking risk, not venturing, and he talked about Cal. I had intimate knowledge of both Cal and Norm. Norm was the best, good man, good father, and he treated us hooligans that ran around with his sons as sons. Cal was three times divorced, and he was a raving drunk with all the problems that come with that. And here Norm was talking of this man, as a beacon of virtue. His statment was nobody employed more men in hte county than he did, and he had been doing it for 35 years. I happened to know that one winter, when he had the banker come and appraise the fleet of trucks for an operating loan, that out of the 25, 15 did not have motors. Transmisssions were out of 6, and 4 or 5 needed the rear-ends re-built. But they were lined up straight and true, and they had fresh paint, or as we used to say, a dupont overhaul, and good windshields. My dad played cards with him, and I heard this first hand, and he got book value loans on a fleet, that was probably worth closer to junk.
My point is this. Norm would have been desiginated the example of example for virtue, and Cal would have been everything thats wrong with business, yet it was Norms observations, I remember about these two from my childhood.
Just food for thought.
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