Next year you'll be one year older (a debt/lifestyle thread)

[luvtolean]

This is far too personal a subject to really get right in broad statements.

Some data from an article that just popped up on Yahoo:

If you’ve racked up a lot of debt on your credit cards, you’re not alone. In fact, of the 90 million households in the United States that own at least one credit card, the average debt totals a whopping $10,691, according to CardTrak.com.
Many of these households are only paying the minimum payments on their credit cards too. If that sounds like you, here’s some food for thought: If you carry the average credit card debt of $10,691 and only pay the minimum payments each month, it will take you nearly 33 years to pay off your balances completely.*

The people of this country have a trillion dollars carried on credit cards. That is not balanced.

I've learned a couple of things. I am not overly balanced when it comes to money, and I want more expensive than normal things. My wife has an almost incredible fear of cashflow interruption.

So being normal, which is pretty much the definition of "balanced" in the poll, is not aligned with my household's needs and wants. Therefore, my plan should not look "balanced".

More important than your budget, or how you run it, is to understand what the aim of the budget is for your whole family. "Getting out of debt" is ethereal. So is "a good retirement". So, yeah, of course those people aren't happy.

What isn't ethereal is "I have a plan to be mortgage free in 10 years, here's what I'd sacrifice to get it. I want to do this so I can protect my family and save $5000/mo to buy a Ferrari."

"I want to race motorcycles, and send the kids to college, so we'll pay the house off in 20, and build up a big cash cushion to mitigate the risk."

You might believe hyperinflation is imminent, and if you do, you should be borrowing every dollar you can.

None of these things are wrong, though some carry more and risk than others, as long as there is a proper goal, and a map to get there.

[phozed]

Paying an extra 10% on your mortgage payment every month is also a great way to reduce principal. Also the 2x monthly payments are another way to reduce money spent on interest.

I see nothing wrong with carrying debt as long as you're the one making money. My wife just got a new CRV this month and Honda had 1.9% financing. We could have paid cash, but I'm guessing the dollar will be devalued by at least that much in 3 years let alone the fact we can do much better than 1.9% if we keep the $$.

Both my wife and I are financially disciplined. We're looking to list our house and move within months. With the stimulus, treasury rates, and current market conditions I'm willing to spend more then we should for a residence. By that I mean our non-retirement investments as well as too much of our nest-egg and not our income/mortgage ratio.

My biggest concern is the housing crisis - I'd much rather spend a little more on the cost of the house riding the wave back up then betting we're at the bottom and being wrong.

Hopefully, we'll be lucky (again) with the biggest single purchase I've have made in my life... again... but... ugh. We're going to pull the trigger shortly anyway. We'll be trading a crowded chicago suburban subdivision with horrible neighbors for many acres of land many miles from town! Wife and I both can telecommute (broadband is a must) - so it's hard to narrow down locations but with family in the midwest or thereabouts we're currently considering Ozarks, MO area. I can only pray my selling goes as fast as Conq's!

[Hammer]

I have no credit cards, payed them off years ago and cut them up.
The bank owns my house and my truck but I am able to make the payments still.
My toy budget is $0, Obama took it with help of the Governor of Indiana.

[08silvercbr]

I see nothing wrong with carrying debt as long as you're the one making money.

Explain what you mean here?

[CBRVFR]

I have no credit cards, payed them off years ago and cut them up.
The bank owns my house and my truck but I am able to make the payments still.
My toy budget is $0, Obama took it with help of the Governor of Indiana.

Your tax rates in '09 were down compared to '08, thanks to the former president and congress, The current administration hasn't had a budget yet. Just in the interest of reality.

[phobe]

No debt except the house right now and only paying 1.5% on that so the balance goes down pretty quick. Vehicles and toys are paid for, no credit card debt.

I'm not that afraid of borrowing though. I'll borrow when it makes sense. I'm planning on borrowing to contribute to my RRSP (401k) again this year and the tax return will pay most of the loan back. I'll put my VFR1200 on my credit line but I'll have it paid off in a few months.

[MotoVegas]

Pssshaww. I'm investing in boat loads of fire. Oh, and guns:
Video: Survivalist Investment Tips | The Daily Show | Comedy Central

[CBRVFR]

So being normal, which is pretty much the definition of "balanced" in the poll, is not aligned with my household's needs and wants. Therefore, my plan should not look "balanced".

More important than your budget, or how you run it, is to understand what the aim of the budget is for your whole family.

My own opinion (and I think this is what Brian is saying) is that the 'norm' has nothing whatever to do with you and your family. YOU must decide how to balance fun and funds, risk and reward, debt and investment and long term stability versus short term need for the good of your own family.

That's why I get a rash every time I hear some financial guru promulgating absolutes.

As a business owner, I have been so far in debt at times that I was worth far more dead than alive. Always nice to have an 'out', right?

I have tried to build a firewall between the risks and frustrations of the business and the stability of my family - and though it seemed hopeless at times, I just kept fighting and it all seems to have worked out.

When cash flow became sufficiently positive, I jettisoned virtually all debt except that which is strategically useful and low-risk.

If things continue to go well, (and they might well not) I'm planning on having the house paid off in the next 8 to 10 years, which will take that payment off the books just as I 'retire' - always cognizant that I might get carried out feet first tomorrow, at which point my insurance will pay out handsomely.

At this age, I'm balancing time versus money - in other words, how much time I'll have to be productive, creative and capable of riding motorcycles. When those things are gone, money won't matter so much.

[DrHall]

Well said Dave.

[slickwill]

I "feel" that many of us who are younger may have to plan additionally for the possibility of less Social Security, less Medicare, more long term care, etc.

That said, right now my back can handle being twisted around a Duc, who knows how long that will last.

I'm about 6 months away from having the first "real" job of my life, and the first meaningfully positive cash flow of my life, so I'd also like to create positive habits from the start.

[HondaGalToo]

At this age, I'm balancing time versus money - in other words, how much time I'll have to be productive, creative and capable of riding motorcycles. When those things are gone, money won't matter so much.

Amen to that. That's where I'm at. You can't take it with you. That doesn't mean I'm foolish and rack up a lot of debt, I don't, but I want to enjoy things such as motorcycle riding while I'm physically able. If that means putting some stuff on credit cards, so be it. Waiting till you retire to do this or that may never happen, particularly if the things you like to do require physical activity. I want to enjoy life, too. If not now, when?

[luvtolean]

My own opinion (and I think this is what Brian is saying) is that the 'norm' has nothing whatever to do with you and your family. YOU must decide how to balance fun and funds, risk and reward, debt and investment and long term stability versus short term need for the good of your own family.

That's why I get a rash every time I hear some financial guru promulgating absolutes.

The investment gurus have knowledge worth taking, Mr. Iconoclast.

But just like a map is only useful if you know enough about your destination to know if you even have the right map in your hands, so to is financial advice.

If your decision is your habits suck and you are a financial drunk, probably a term applicable to most of this country, a guy like Dave Ramsey has some pretty good advice. His whole thing is about changing your behavior, and how never to end up back on the sauce. Based on the bit I know about AA, Dave is AA without the meetings for debtors. God references included. If you're a drunk there is no "balanced" level of alcohol consumption.

If you know you just need a solid kick in the ass, I read a book by Larry Winget over the weekend that is relatively funny (for a finance book), but in your face kick in the ass. He pretty much offered nothing other than that.

Neither one of these guys are much help if you plan to carry debt. (Dave's plan in particular could destroy you in a hurry if you aren't able to get to his end state of no debt with extraordinary discipline by the whole family.) If you do, you need more "balance". That is spread more money into savings and retirement rather than focusing solely on killing the debt.

If you're analytical, read some books on bankruptcy stats. I did this and found a stat in there that was pretty interesting. Bankruptcy spikes dramatically when unsecured debts of all types hit 1.5x earnings. (If we're honest with ourselves, car/bike/boat loans are arguably often effectively unsecured debt too.) Then of course, read some books on rich people stats, like Millionaire Next Door.

Most financial advice I've read actually isn't much good to the small business owner, though many times they do offer it to them, who has a different financial situation than an employee.

None of these books, or much someone can tell you, is helpful if you don't know your own problem, your personal habits and your personal limits on discipline. After that, you then need to know what you want the end state to look like. According to a couple of books I've read, 97% of the country has no goals. So it's no wonder so many people have crappy finances, and vulnerable to the products of the financial industry...

[CBRVFR]

The investment gurus have knowledge worth taking

Sure they do, but since the advice you just wrote isn't absolute and references multiple sources and approaches, it's probably more valid than any 'professional gurutic' approach that is self contained and absolute. Maybe I'll join YOUR creepy cult after all!

For clarification, are you saying a lot of bankruptcies trigger when the new value of the unsecured assets is 1.5X earned, before-tax income?

So if a person makes $75K annually they are likely to get into trouble at the point at which they're attempting to carry 112K of credit card, car and toy debt?

If I understand you, that's not hard to believe...

[luvtolean]

For clarification, are you saying a lot of bankruptcies trigger when the new value of the unsecured assets is 1.5X earned, before-tax income?

So if a person makes $75K annually they are likely to get into trouble at the point at which they're attempting to carry 112K of credit card, car and toy debt?

If I understand you, that's not hard to believe...

Correct. The book was written based on data taken as student loan debt was just really exploding, and as he said, he wasn't exactly sure how that would play out.

Student loan debt is unsecured and a heavy burden, especially as they are the only creditor that can garnish wages without a court order. (I don't really call the IRS a creditor per se, but they too of course have the privelage to destroy you per their whims.) But bankruptcy offers no relief from it. You're at the mercy of them "charitably" offering you an interest accruing forebearance if you get into trouble.

As so many people I know are graduating with 1.5x + in student loans as higher education has far outpaced inflation, I think this is a huge HUGE problem facing this country. I'd put it in the top couple on the list actually, as that burden makes it very difficult for these people to become consumers, purchase the assets of the previous generations and have their taxes increased to clean up the Boomer's disasters without triggering other disasters.

If anyone is interested, here is that book: http://www.amazon.com/Fragile-Middle...5&sr=8-1-fkmr1

Beware, it is a difficult, not very well written read by a very victim-minded author. Unless the last quarter or so of the book suddenly got amazingly good, I wouldn't know as I quit reading it, the reviews are ridiculously high on Amazon IMO.

[SHOTIME]

For those discussing budgeting and "frivolous spending", what % of your gross are we talking about here? (or what amount of $ if you want to make it easy on me).

I fail to budget, that's my problem...

My wife and I give each other $50 a month to spend on ourselves. We each choose how to spend that money.

I tend to save a portion of it up for purchases of Cigars and nights out with the boys. She likes to spend a it going out to lunch with the girls at work and less frequently on her camera gear.

We both consider the money "no questions asked" meaning I don't have to clear my purchase with her, and her with me. And I don't mean that in a negative way, we respect each other enough to talk about our purchases. If we discuss something the other wants its pretty likely the other will agree.

As much as we want to get out of debt, We want to enjoy the period of our lives (early 30's) before our friends have babies and it gets harder to get out for what ever reason.

[slickwill]

CYou're at the mercy of them "charitably" offering you an interest accruing forebearance if you get into trouble.

As so many people I know are graduating with 1.5x + in student loans as higher education has far outpaced inflation, I think this is a huge HUGE problem facing this country.

Forebearance is the road that almost all medical residents take. Avg resident salary $45k, avg debt for med school is over $200k.

[BizJetGuy]

I "feel" that many of us who are younger may have to plan additionally for the possibility of less Social Security, less Medicare, more long term care, etc.

Not to get political but SS, Medicare and other government programs don't even factor into our plan.

We're not counting on them being there so, if they are, it's gravy.

[slickwill]

I'm definitely not factoring it in. My parents aren't either.

[luvtolean]

Forebearance is the road that almost all medical residents take. Avg resident salary $45k, avg debt for med school is over $200k.

Yes, it's ridiculous. Our politicians say they want the people to have more access to doctors, yet they raise the price of medical school at public schools yearly.

So you have to make the insane decision to carry 4x + of your yearly income in debt, accruing interest and making no payments.

Then they put income restrictions deducting the interest on the loans so you get to bear the full weight of the interest yourself, and they keep threatening to increase tax rates on the high income brackets, where a doc must be to "catch up", more heavily.

This all after having watched your friends who became plumbers buy houses, keep most of the money they make and start families and generally live the good life the 12+ years you've been in college and residency.

The system is fucking broken if we view the aim as being designed to encourage kids to become high performers. It's pretty good if we want to encourage people not to get advanced degrees and get ahead of those around them though. The stats bear out the effect of these policies, over the last decade, the percentage of American males getting college degrees has declined 10%.

Not to get political but SS, Medicare and other government programs don't even factor into our plan.

We're not counting on them being there so, if they are, it's gravy.

I'm definitely not factoring it in. My parents aren't either.

Only way they wouldn't get it is a catastrophic failure of the whole system. The Baby Boomers are far too large a voting block, and FAR too unprepared for retirement, for these programs to go away until enough of them die off that they don't generationally own a disproportionately large voting block.

[ND4SPD]

Only way they wouldn't get it is a catastrophic failure of the whole system. The Baby Boomers are far too large a voting block, and FAR too unprepared for retirement, for these programs to go away until enough of them die off that they don't generationally own a disproportionate voting block.

Unless our national credit card gets maxed out first...

[luvtolean]

I'm planning on borrowing to contribute to my RRSP (401k) again this year and the tax return will pay most of the loan back.

I've effectively been doing that for the 10 years of this secular bear. I've accumulated debt rather than stop my contributions, in fact I've been increasing them over time despite carrying debt. We borrowed, er paid down debt the least, in 2009 as we cranked up the contributions to our most ever despite wedding, honeymoon and house purchases. If you're young and paying attention to the opportunities, and continuing your education in the investing you want to do, and working on continually improving your professional skills to hedge your unemployment/underemployment risks, I think it's an approach with merit. (obviously)

We've significantly reallocated this year as the interest payments are too large and too risky for our tastes, and our retirement holdings are quite decent now. I'm also just emotionally over of the rising, falling, rising, falling cycles of debt. No more signing away our future prosperity.

[SomeStrangeGuy]

Financial drunk...I like that term.

Good discussion here...

[ND4SPD]

Like bwhip and CBRVFR suggested - finding your balance point is key. I don't feel like I'm balanced, but am definitely closer than I was even just 12 months ago. I feel like I'm headed in the right direction but really don't know what the end result looks like. I think it's important to have short term and long term goals and try to meet those however you can. I was able to meet a major goal at the 11th hour last year and am hoping that I can do the same this year, even if it comes at 11:45. It will put me that much closer to goals I have set further out.

Whether you're eating an elephant or a cow, you still have to eat it one bite at a time. Set realistic, attainable goals and reward yourself accordingly when you reach a milestone. This will help you stay focused and hopefully feel less overwhelmed.

I don't think we ever "get there". It's human nature to always want more.

[CBR929RE]

Explain what you mean here?

I see no one answered this for you. take his car example for instance. the interest is 1.9%. he could pay for the car in cash and not have any interest to worry about. but if he can take that cash he has and invest it now at say 2.5%, he'd be making money even though he's carrying debt. he might as well take the loan and invest the cash because his investment return is greater than his debt interest.

that's the general idea but time will also factor into it.

[SheepOfBlue]

I see no one answered this for you. take his car example for instance. the interest is 1.9%. he could pay for the car in cash and not have any interest to worry about. but if he can take that cash he has and invest it now at say 2.5%, he'd be making money even though he's carrying debt. he might as well take the loan and invest the cash because his investment return is greater than his debt interest.

that's the general idea but time will also factor into it.

The other problems with that are:
Is the 2.5% guaranteed? If not factor in risk.

Double counting. Many would have the tendency to count the cash as an asset while neglecting the offset of the car.

Risk, you have the car and put the money in a 24 month CD (low risk) then total the car. You are upside down (hopefully not literally) where do you get the cash?

[CBR929RE]

The other problems with that are:
Is the 2.5% guaranteed? If not factor in risk.

Double counting. Many would have the tendency to count the cash as an asset while neglecting the offset of the car.

Risk, you have the car and put the money in a 24 month CD (low risk) then total the car. You are upside down (hopefully not literally) where do you get the cash?

yup always a bunch of factors in it. I was just being very general about it.

[abtech]

The other problems with that are:
Is the 2.5% guaranteed? If not factor in risk.

Double counting. Many would have the tendency to count the cash as an asset while neglecting the offset of the car.

Risk, you have the car and put the money in a 24 month CD (low risk) then total the car. You are upside down (hopefully not literally) where do you get the cash?

I hear they have this stuff called insurance for that contingency . . .

[SheepOfBlue]

I hear they have this stuff called insurance for that contingency . . .

Yep and many people start out upside down and under insured (though more policies are now doing guaranteed replacement).

[luvtolean]

Don't forget taxes on your gains...

[08silvercbr]

YOU must decide how to balance fun and funds, risk and reward, debt and investment and long term stability versus short term need for the good of your own family.

I agree, but the problem is most people can't figure out what that balance is.

The investment gurus have knowledge worth taking, Mr. Iconoclast.

But just like a map is only useful if you know enough about your destination to know if you even have the right map in your hands, so to is financial advice.

If your decision is your habits suck and you are a financial drunk, probably a term applicable to most of this country, a guy like Dave Ramsey has some pretty good advice. His whole thing is about changing your behavior, and how never to end up back on the sauce. Based on the bit I know about AA, Dave is AA without the meetings for debtors. God references included. If you're a drunk there is no "balanced" level of alcohol consumption.

If you know you just need a solid kick in the ass, I read a book by Larry Winget over the weekend that is relatively funny (for a finance book), but in your face kick in the ass. He pretty much offered nothing other than that.

Neither one of these guys are much help if you plan to carry debt. (Dave's plan in particular could destroy you in a hurry if you aren't able to get to his end state of no debt with extraordinary discipline by the whole family.) If you do, you need more "balance". That is spread more money into savings and retirement rather than focusing solely on killing the debt.

If you're analytical, read some books on bankruptcy stats. I did this and found a stat in there that was pretty interesting. Bankruptcy spikes dramatically when unsecured debts of all types hit 1.5x earnings. (If we're honest with ourselves, car/bike/boat loans are arguably often effectively unsecured debt too.) Then of course, read some books on rich people stats, like Millionaire Next Door.

Most financial advice I've read actually isn't much good to the small business owner, though many times they do offer it to them, who has a different financial situation than an employee.

None of these books, or much someone can tell you, is helpful if you don't know your own problem, your personal habits and your personal limits on discipline. After that, you then need to know what you want the end state to look like. According to a couple of books I've read, 97% of the country has no goals. So it's no wonder so many people have crappy finances, and vulnerable to the products of the financial industry...

You sir are starting to sound like me more each day. Creepy

I see no one answered this for you. take his car example for instance. the interest is 1.9%. he could pay for the car in cash and not have any interest to worry about. but if he can take that cash he has and invest it now at say 2.5%, he'd be making money even though he's carrying debt. he might as well take the loan and invest the cash because his investment return is greater than his debt interest.

that's the general idea but time will also factor into it.

Like sheep said. The risk factor. If you have no bills money is available to invest without playing the games. You are still paying extra for the car by paying intrest. Not that I'm saying that is wrong, just the statement.

I hear they have this stuff called insurance for that contingency . . .

You would really be surprised today on how many don't carry it around here.. and drive brand new cars. They end up in our shop ALL the time. "I could afford the car, but couldn't afford the insurance". Not quite sure how they even pull it off.