Monday, February 25th, 2008
In a previous post I wrote about how I manage debt and how I believe that making payments on a car loan is the absolute worst financial move I could make. I also talked a little about how I use a credit card to manage my monthly cash flows and the advantages that I receive from it.
Along these lines, I must convey a story about my brother that just recently happened. This is not fiction and is the honest truth. First off, let me say that my brother is the exact financial opposite of myself. He is out for one thing and one thing only - to spend all, and more, of the money he makes!
On With the story.
My brother recently decided that his 2001 Chevy truck was costing him too much money in fuel and maintenance costs - not to mention the $400/month payments he was making on his loan that he is upside down on (he owes more than the truck is worth). So, he decided that it was in his best interest to sell the truck.
I said “Good Idea”!
He then proceeded to sell the truck and even went a couple of weeks without a vehicle. I thought that maybe he had changed and that he was going to purchase an older, more reliable vehicle that he could afford. He even mentioned to me that he found a grandmother with a 1991 Ford Tempo that had very few miles on it and she would sell it for around $1500.
I said “that would be a great idea”!
At this point I really thought that he had changed and I started to feel proud of myself. I thought that my explanation to him about how he couldn’t get a mortgage for a house that he desperately wanted if he had to make lofty monthly car payments had finally hit home.
The Call Came
I received a phone call from my brother and I could tell that he was very excited on the other end.
Me: “So did you buy the car”?
Him: “Even better, I got a 2005 Chrysler 300 for $3000 less than market price”!
Me: “That’s great, so you can sell it and make about $3000 toward a down payment for a house”.
Him:“Well, I just talked to the loans guy at the Credit Union and he said that since I just started a new job I wouldn’t be able to get a mortgage for a couple of years anyway, so I might as well drive a sweet car”. He didn’t even ask the loans officer how he could improve his credit score in order to qualify for a better rate on his loan. In fact he doesn’t even know what his credit score is!
If you live in the United States and you don’t know what your credit score is, you can find out for free from Experian.
Me: “Sigh…Well if that is more important to you than buying a house (sarcasm here)”.
My soul fell directly to my boots as I realized that my “talk” had not sunk in and he had certainly not changed. He has continued to run on the Car Loan Treadmill and I’m saddened to say that he will likely never get off of it.
I have had several conversations explaining to him the basics of personal finance to no avail. He continuously declares that he wants to save money, have an emergency fund and buy a house, but he refuses to follow even the most basic rule of spending less than you earn.
Moral of the Story
If you spend more than you earn and owe more than you own (negative net worth), you will not be wealthy.
Posted in Investor Education | 1 Comment »
Friday, February 22nd, 2008
I have received a handful of e-mails lately asking to hear my story about overcoming more than $40,000 in student loan debt to having no consumer debt and a net worth of more than $250,000 in just three years.
The title of this post is rather misleading because I do appreciate the wealth building power of leverage as I mentioned in my article detailing mortgages. Of course, mortgages are financial debt instruments that the vast majority of people require in order to purchase a home.
Why I Use Credit Cards
I also utilize one credit card on a monthly basis. I use a credit card for a few reasons:
1.) It helps me to track my expenses. I simply download my card statements to a financial program such as MS Money and divide my expenses in to categories. If I use my credit card for all of my purchases, it makes analyzing my budget a snap.
2.) It saves me money. Yes, using my credit card saves me money. When I use my debit card, my credit union charges me a fee per use (or more accurately a monthly fee that includes a number of debit transactions). When I use my credit card, the credit card company charges the business where I used my card instead of charging me personally.
Yes, you could argue that it still costs me money indirectly as the business would factor that charge into the price of the product - but please bear with my example.
3.) I receive rewards from the credit card company for using my card. My particular card offers me 2 points for every dollar I spend which, if used for travel, equates to approximately 1.75% cash back - not too bad!
I do advocate the use of credit cards for these purposes if, and ONLY if, you use them for managing monthly cash flow and not for accumulating debt. This means that you must pay off the entire balance each month - no exceptions.
To help you sort through the thousands of Credit Card offers to find one that suits your needs, I suggest using a service designed to match you up with a card that will benefit you and not take advantage of you.
My Stance On Auto Loans
Several folks have inquired about vehicle loans, asking if I own a vehicle and if so what types.
Vehicle loans are the biggest mistakes that I could ever think to make. Not only do vehicles depreciate, but they also require fuel, repairs, insurance and maintenance. There are no two ways about it - owning a vehicle is expensive.
That being said, my wife and I own two 2003 Hondas which we paid for with cash. We purchased a 2003 Honda Civic in the fall of 2005 and a 2003 Honda CRV in the fall of 2007. Yes, I do adamantly believe in purchasing high quality used vehicles that are fuel efficient and known for reliability.
Why Honda? It is simple really. I owned a 1991 Honda Civic hatchback in college and it had over 300,000 KMS on it and ran like a top. I simply filled the gas tank and changed the oil - I was hooked.
This has been a quick outline of my current stance on debt.
I also have no problem advising anyone to take out student loans to invest in themselves and their future. However, you must be careful not to “live too high on the hog” on borrowed money while in college.
Stay Tuned For The Rest of My Story
In a future post, I will tell you how I graduated from college with fewer student loans than most of my classmates and how I managed to pay off the balance within a year after attending my final class!
Posted in Debt | 8 Comments »
