If you’re new here you probably know I took a vow to not take on any new debt with one exception (a reasonable mortgage). I don’t care what it’s for. I’m just not going to borrow money. As a result, whenever I stumble upon articles talking about “good debt” and “bad debt” it frequently makes my blood boil. If I can’t “pay” for something I just won’t get it. The word “payments” just drives me nuts. So when I got lost over at Quicken’s website earlier today and started clicking around their “personal finances” support I was unpleasantly surprised to find a post about when debt is “worth it.”
To be fair, their “short answer” to the question of when it’s worth it to go into debt, they acknowledge that “it’s usually not” and they offer the general rule that if you don’t have the money, don’t buy it.
But then it gets ugly when they give “spendy friendies” all the excuses they need to spend money they don’t have with a list of “exceptions, gray areas” and the “defining question you should ask yourself before you whip out your plastic or fill out that loan application: Will this purchase appreciate in value?” To make a “short story long” they suggest that if the purchase will go up in value it might be worth it.
Wrong. OK. Technically “wrong” might not be the best word. “Dangerous” might be more appropriate. Why? Simple. Because it gives spendy friendies all the excuses in the world to buy memorabilia, beanie babies, cabbage patch kids, “art” (whatever that is), antiques, stocks, bonds, or whatever that either is not a real investment or is so risky that you could lost your “investment” and end up stuck with the debt.
Got it? As to the specifics, here are some specific items and their recommendation. (my two cents, too).
- Wedding ring: NO. Good. If you need a big ring to get to “yes” you might want to reconsider asking the question.
- Grad school: YES, with caution. You know I borrowed for grad school. And you know my take on choosing college. But I “gotta tellya,” I would have done a few things differently if I could go back. I worked a ton, but I would have worked more. I also wouldn’t have bought that motorcycle with money I could have used to pay tuition… I ended up saving up enough to pay off my student loans by selling a bunch of crap I didn’t like anyhow and putting savings on auto-pilot and then some (more on that later). I also had a bunch saved up to begin with so it wasn’t like I was starting from zero. This is way too complex of an analysis for a bullet point. If you need a rule, I’d beg you to choose undergrad better (state school) and even grad school and pay your way through. No debt. It’s possible, believe me.
- Car: SOMETIMES. Nope. Wrong. Buy a beater and save up. Move up in car every few years by saving more and more and pay cash. I don’t agree with everything he says, but here’s an example of how that would work by Dave Ramsey.
- Travel: NO. I know people who took money on a mortgage to travel. Crazy, right? Well it’s not uncommon. But no SAFTM readers will ever do this again, OK? Say it with me: No borrowing for travel.
- Furniture: NO. This one is dangerous – not because furniture is so terrible, but because this one gets a bunch of people in trouble. I know people who have IKEA furniture in a $750,000 house. It’s OK. If you want fancy furniture, buy some normal stuff and save up. Please.
- Home: YES. Again, too complicated for a bullet point but if you can keep your monthly costs (all monthly costs) low, then go for it. Please get a fixed rate mortgage though. I don’t care what the teaser rate is. Just get a fixed rate mortgage where you can keep all home costs to no more than 1/3 of your take home and you’ll probably be OK. I agree with Dave Ramsey that 1/4 of your take home is the target though. Remember, this is all about risk.
Now my list. Home: Yes, with caution. Everything else: No. Please no.
Got it? Who’s with me on my no new interest pledge?
Until next time, put your credit card down and slowly step away from the mall!
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{ 8 comments… read them below or add one }
After paying off my school loans, I should have only graduated with about $20,000 in loans versus the $33,000 I ended up with, I haven't paid a penny of non-mortgage interest!
I do use my credit card to pay for vacations, but have always paid off the monthly balance each month. I've paid cash for my car. Right now I'm going without a couch until my tax refund comes in because my "home decor/furniture" budget has run out.
At this point in my life owing someone money terrifies me, so I'm doing everything I can not to fall into any debt traps.
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School is a key point. We are in a society where we have been told it is important for everyone to get a college education, but I disagree with this. There are a lot of professions that do not require a college degree. Not everyone is made for college, and not everyone should incur debt to go.
For those who do go, choice of school is important. A social worker will never earn enough to pay back huge school loans. A social worker also doesn't need an ivy league degree to do his/her job. State school is the best option. A doctor, however, will find that if he/she goes to a better school, his/her income options are greater. In that case it may make sense to incur some debt. This is an oversimplification, but the point is there.
I agree with you list, and I won't be going into debt for anything anytime soon (even a house, since I'm moving around a lot).
I went into some debt for a graduate degree (which I'm not currently using), so I would say degrees are a "maybe" at best. You really have to be 100% sure in what you're doing before going into debt over education.
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Great job not taking on any new interest payments. I, too, use credit cards and pay them in full. I don't have a problem with that as long as it's part of intentional spending (i.e. a budget). Some people get in trouble even when they pay it off in full because they end up spending more.
It sounds like you're very much in control and disciplined! I, too, would rather sit on a chair or the floor than go in debt for furniture. Great job!
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School is pretty tricky and that's the main reason I think the general rule should be no debt. Too many people finance the lifestyle of college when they take on student loans, too, so they end up with way more debt than needed for the degree. I'm sure you know just as many people who bought kegs with student loan money. Or even if they didn't direcly buy the kegs with the loans, they borrowed more to pay tuition so they could use other money to party. I completely agree with the analysis re only buying as much college as you need, too. It will catch on eventually!
Thanks Jeffrey! I came out of school with debt and work in my field. Even though I'm using my degree it's still pretty painful seeing those payments come out! Having the payments just add unnecessary stress.
It's crazy. They lend 18-year-olds tens of thousands of dollars and tell them to pick a career. I agree. If you're not 100% sure of what you want to do and smart about selecting the right college, etc., you could end up borrowing a lot of unnecessary money.
Thanks for stopping by!
Count me in on the no new interest pledge. Should we make a badge?
I love it! We definitely need a badge! I think it deserves its own page here, too. We can be founding members!