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How To Avoid Debt, Use Credit Wisely
Don't Go Into Debt For Consumption
One basic rule: Don't take on debt to support consumption. Debt is to further an investment. Student loans are an investment. A truck for work is an investment. A house may be an investment, but probably isn't. Live your life debt free, without worry. Don't run up your credit cards to buy things that won't last.
We chose the home we bought as an investment in our children. This town has one of the top public schools in the state. We paid a little more to live here than in other nearby towns, but so far I have no regrets. The kids are doing great. But I don't consider my home a financial investment. Your family home is consumption, not normally an investment. Look at the long term trends. Homes appreciate at the rate of inflation. At best you hold steady, unless you are lucky enough to catch a boom, and sell before the bust.
We didn't get a mortgage to buy this home. We paid cash. And we paid cash for our two cars. Our only 'loss' is the lost income we might have made on our investments if we had kept the money in mutual funds or other investments, rather than pulling the money out for the purchases.
Why NOT get a mortgage? After all, you get a tax break on the interest, right?
I look at it from the opposite direction. When you borrow the money, the bank expects to make that money back, plus interest, from you. You pay the bank to use their money. I pay myself. I save the money first, invest it, and the BANK PAYS ME for the whole time I save it before buying something.
Which way is likely to work out better for you in the long run? You paying the bank, or the bank paying you? I would rather be receiving interest than paying it. Remember, when you borrow money, you are paying to put the banker in his latest new car.
How did my wife and I get the cash to buy a nice house in a great neighborhood? We have two kids, and kids cost money too. Lots of people seem to think that saving that big a pile of money is impossible. It isn't, and we didn't have an unusually high income, inheritance or sugar daddy to pay for it.
We both worked, and we saved half our income for ten years to afford our current life-style: debt-free, money in the bank.
We lived small for ten years. We lived in a tiny apartment. We didn't own a car. We bought some of our clothing at garage sales, and the kids wore hand-me-downs (usually name-brand, often brand new) from my family's kids and my wife's friend's kids.That all sounds cheap and low-class. So what? I wear nice-looking clothes, and my kids wear name brands.
Even name brand clothing goes on sale. Sometimes ridiculously cheap sales. My daughters both bought new racing spikes this month. New, $150. On sale from the manufacturer, $10 per pair. Even got free shipping. The internet is your friend. Think before you buy, Google for sales, look for on-line coupons.
What I own, I own. I don't worry at the end of the month about whether I can make the credit card payment, or whether a bill collector will be dropping by. My house didn't get foreclosed on. I am in God's hands, not at the mercy of a bank or credit card company. God has mercy on us. The companies? Not so much.
We pinched pennies on food and rarely ate out. I bought old furniture that was really expensive when new, and repaired and refinished it. It looks great, better than the cheap crap you can buy new on your credit card, and still be paying for when it is already broken. We got some very expensive new furniture at low prices because it had a few minor dents on it. I repaired it myself. Go to a high-end furniture store and ask if they have any scratch-and-dents for sale. They always do.
To save the money, you have to put it away where you can't get at it easily. Have it direct deposited in an investment, if you don't have the will-power to keep it. Look at your investment statements regularly, and congratulate yourself on your progress. Feel good about it.
Don't don't DON'T use the credit card to buy consumer goods! Unless you are going to pay off the ENTIRE balance at the end of the month. We pay no interest to the credit card company. Not ever. We use the cards daily for purchases, because it makes it so easy to track our expenses. At the end of the month we can see exactly what we have bought, where, when, how much. Plus, we earn points on the card which we use to buy Christmas presents for the kids.
Always pay off your card balance every month. If you don't, you are paying rich bankers so they can buy new cars. They are using your money, and you pay them for the privilege. Turn that around. Make them pay YOU. You can game the credit card companies instead of them gaming you. We recently got a new card. It gave us $300 back for the first $500 we spent on it. That was $300 of FREE MONEY! That new card also gives us cash back on gas, groceries and other purchases.
Since our credit score is good, we can get great credit card offers. Google for credit card deals; you can find lists of the most current offers and choose the card that gives you the most back. These deals are not listed on the card company's own web sites. You have to hunt them down, but they exist. Maybe next year we will cancel this card and sign up for a different one, if they offer the opportunity for great rewards or cash back. Don't bother with the offers that come in the mail, they are not very good.
I was fortunate to be burned by a credit card when I was quite young. I also saw my young friends get burned, and I vowed to get out of debt and stay out. Mostly, I have, and I am very lucky to have a wife who sees things the same way.
Don't pay the bank or the credit card company to use their money. Make the bank pay you. Save, invest, earn interest. To paraphrase Ben Franklin, if you earn $20 and spend $19.50, you will have a happy life. If you earn $20 and spend $20.50, you'll have an unhappy life.