What Kind of Debt Is Acceptable?

What Kind of Debt Is Acceptable?

Acceptable Forms of Personal Debt Although I have been harsh on debt and believe we should pay cash for as many things as possible, I acknowledge that some forms of debt may be the best way to meet some of our most critical spending needs. When used wisely and sparingly, it can provide tremendous opportunities for economic improvement that may never be available otherwise. In my opinion, the most responsible use of personal debt would be limited to reasonable amounts for education, a modest home, and basic transportation. It may also be prudent for businesses to incur certain forms of debt at sensible levels for expansion that would be impossible otherwise, but we will limit our discussion here to personal debt. Why am I okay with debt for these purposes? Since higher education often dramatically improves potential earning power, and since our ability to earn an income is typically our greatest asset throughout most of our life, student loans may produce a higher long-term return than any other investment we could make. If a student’s parents or grandparents cannot afford to pay higher education costs for her, she may never be able to save up enough money on her own to pay for the schooling required to increase her earning power so substantially. In this case, student loans can be a very valuable tool. Still, we must be careful not to spend more on education than we can reasonably expect to be able to pay back based on the earning potential of employment opportunities related to our field of study. We can minimize the use of student loans by...
What Do You Want Most in Life?

What Do You Want Most in Life?

Everyone has a unique perspective on life. When first meeting with a financial advisor, you should share as much as possible about your personal goals and concerns so his or her recommendations will be consistent with your desires. You must clearly articulate what you want most so you can use your priorities as a measuring stick. If you don’t know what you want, how can you effectively decide what to do? Lewis Carroll masterfully captured this concept in Alice’s Adventures in Wonderland, in which Alice asks the Cheshire Cat, “Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where–” said Alice. “Then it doesn’t matter which way you go,” said the Cat. What Are Your Priorities? Here are some examples of what I have articulated as my biggest priorities in life: To be at peace with God, other people, and myself. To have great relationships with my wife, children, extended family and friends (in that order). To help improve the lives of other people as much as possible through my profession and through community and church service. To live a long, healthy, fun life! On the surface, it may appear that these objectives have nothing to do with financial decisions, but they are actually very closely linked. For example, to be at peace with God, other people, and myself, I must be honest in all of my financial dealings. This means that I do not borrow more money than I know I can repay, I pay...
Pay Off Debt or Invest For the Future?

Pay Off Debt or Invest For the Future?

Often people ask me whether they should pay off all debts before saving for the future or save first in hopes of earning a higher return on investments than they are paying in interest on debts. This is an age-old debate, and I have heard convincing arguments from Financial Advisors on both sides. The “Pay Off Debt” Argument Some advisors recommend that we liquidate all of our savings and investments except a very small amount, even as low as $1,000, to immediately pay down as much debt as possible. Then they recommend that we use every discretionary penny from each paycheck to eliminate the remaining debts as quickly as possible. After we are completely debt-free, then we can start saving and investing for the future. I admire people who are disciplined enough to follow this extremely aggressive strategy, but it is risky because it does not leave an adequate safety cushion. A $1,000 savings account would not be enough to cover unemployment, major unexpected expenses, or serious extended illness. What would happen to my house if I could not make my mortgage payment for six months due to unemployment? Would the bank cut me any slack because I had been paying them extra for the past year in hopes of paying my mortgage off sooner? Not likely. We should always maintain at least three to six months of living expenses in liquid savings, even if we have debt. The “Invest it All” Argument On the other extreme, some people recommend borrowing as much as the banks will allow and investing it all because they declare we can make more...
Benefits of Wise Financial Choices

Benefits of Wise Financial Choices

Devastating Results of Poor Financial Choices It takes time and effort to decide what our biggest priorities are. It takes even more time and effort to be sure that our financial decisions are always in harmony with these priorities. However, the reward is well worth the price. What is the alternative? Let me share with you some of the consequences I have seen people suffer as a result of poor financial decisions that were inconsistent with what they really wanted most: Constant stress and worry Nervousness Sleepless nights Obsessive preoccupation with money, with difficulty focusing on other things Fear of losing money or other possessions Taking too much risk with investments Missing out on investment growth opportunities Obsession over daily market fluctuations Poor physical health Poor mental, emotional, and spiritual health Strained family relationships Divorce Lack of freedom to change jobs or start a new business Lack of freedom to move to a new location Having to move in with extended family members Delayed retirement Inability to retire ever Inability to help others in need Poor performance at work Job loss Inability to appreciate the simple beauties of life Inability to obtain a quality education Inability to help provide a quality education for children or grandchildren Lack of passion, ambition, and excitement for life Lack of trust in others Lack of trust by others Indecisiveness stemming from fear of making another mistake Procrastination Overeating Oversleeping Shoddy personal appearance Loss of creativity Loss of self esteem Hopelessness Alcohol, tobacco, and drug abuse Suicide What is the cost of making casual financial decisions which are inconsistent with our biggest goals in...
How to Start Saving for Retirement (or Any Financial Goal)

How to Start Saving for Retirement (or Any Financial Goal)

Slow and Steady Wins the Race Often when I meet with people who are learning good financial principles for the first time, they are anxious to get started and want to do everything perfectly right away. I am glad for their enthusiasm, but this approach may not be sustainable. I would not normally recommend that people immediately start saving 20% of their income if they are only accustomed to saving 5%. That would be like trying to run a full marathon if they had never run more than six miles at a time. Marathon trainers recommend starting with a much shorter distance than the full 26.2 miles, then adding no more than 10% to the training distance each week. Otherwise, trainees could injure themselves and lose months of progress. Likewise, too big of a sudden increase in savings could cause “financial injuries” such as increased credit card debt, marriage tension, or spending binges. We may even become so frustrated that we stop saving completely. Of course any level of savings requires some sacrifice, but starting with a realistic amount that does not hurt too much is more healthy and sustainable. Then we can gradually increase it over time. How to Get Started Saving Those who are not saving anything at all right now might even want to try starting with only 1-2% of income. Most people are surprised how little they feel the difference when they increase their savings by modest amounts. Then gradually building from there is easier. Just remember that whatever amount we decide to save now, in the future we are likely to wish we had saved...
Debt: Self-Imposed Slavery

Debt: Self-Imposed Slavery

Perhaps the most severe cost of going into debt is the resulting loss of freedom. It truly is a form of self-imposed slavery. Too few of us enjoy the level of freedom our founding fathe24rs intended for us. We may not be oppressed by political dictators, but we often voluntarily submit ourselves to dictatorial creditors. Many of us lock ourselves into huge long-term commitments without knowing whether our future circumstances will allow us to honor these obligations. We may barely be able to qualify for the payments on a large new home, but we want it so badly that we buy it anyway, in hopes that the payment will feel more affordable as our income goes up. Then the unthinkable happens: our income actually goes down, or stops completely, and we lose everything. Consider the following observation by J. Reuben Clark, Jr: “Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; …it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”[i] Maybe part of the reason so many people readily incur excessive amounts of debt is that the penalty today for failing to meet...