Friday, January 25, 2008

Good Debt vs Bad Debt

We have a lot of bad debt. We also have a lot of good debt. How do I define them?

Bad debt 1: credit cards!!!! We have $15750 available to use from Credit cards. Are we maxed out? No. Not anymore anyway. (Thank you car wreck in Sept 06). Were we maxed? Yes. How did it feel? Absolutely terrible, frightening, overwhelming, so incredibly long-term that I couldn’t see my way out. There is light at the end of the tunnel though. February is shaping up to be an incredible financial month. (I am not getting my hopes up too much, I don’t want to tempt fate with a car repair or something.) But we both have 3rd paychecks, Alann’s paychecks are going to be real, a CD of mine matures, we have already received some extra money from selling some stuff, and we anticipate a decent tax return. Between all of this, I am hoping to completely wipe out my CC debt. I owe $350 on my Capital one card (yes honey, it’s high, I’m sorry. It is your ink’s fault.) I owe $1650 on my other credit card. I am really hoping to wipe this out, even if it means cleaning out my savings account. Mostly anyway. I want to leave $500 for emergencies.

Bad Debt 2: Store credit accounts: I have 1: RC Willey, a furniture store. I got that when I bought our bed, when Alann finally conceded that the one that we had, was indeed caput. And it didn’t fit in the truck. You may think I am incredibly stupid for the next comment I am going to make. I did not realize when I signed the paperwork, that this was a credit account. Don’t ask me what I thought it was. I just didn’t think it was credit. It didn’t equal credit card in my mind. I didn’t realize that until I pulled my credit report the following year and it was listed as a revolving credit account. Boy was I surprised! Am I upset or worried about it? No. Why? I don’t owe them anything. And that credit has saved me twice. We bought the bed on 6 months same as cash (no interest) and we bought our dryer on 3 months same as cash (no interest), both of which we needed NOW and didn’t have the money, but we did pay both off without paying interest. Go us. Could we have saved for 3 months to get the dryer? Yes, obviously we could have. We had already lived for 3 months without it, and if you have ever worn air-dried underwear, you know our desperation for a dryer. Try it. It isn’t fun, even with fabric softener (which ruined one of my shirts). Could we have lived 6 months without a bed? Maybe. We have sleeping bags and plenty of pillows and blankets. Would you want to try it though?
Alann has 2 other store accounts. One was for my ring. One is with Gateway Computers. Again, neither have any money owed. Should we close these? I don’t know. Alann says maybe he will close the Gordon’s one. We don’t plan on buying any more jewelry any time soon. Plus our regular Credit cards have better interest rates.

Bad debt 3: My car. Now, I was not stupid when I bought my car. I took $2000 from the car accident settlement and used that as a down payment. I also did not finance through the dealership. I financed with my credit union. And I think I got a pretty good deal. I currently owe $7500 on my car. It is valued at $11780, in excellent condition. Mine is not in excellent condition, but it is very good. So $11,000.
Also, I looked ahead in my life before I bought my car. I wanted something with good gas mileage (30mpg, awesome). I wanted something that was a manual transmission. I wanted something that could accommodate not only my dogs, but my future children. At the same time. Yes, we can do this. My little dear also has a moon roof and some other features that increase her value. So this car is going to last me a long time. And I love driving it. It fulfills my needs. Honestly, I don’t anticipate selling it or getting rid of it until it either dies, or we just cannot possibly fit into it anymore (as in, we have 3 children in car seats or 4 children total). So this is a good thing for me.
So why is it bad debt? There are people out there who will tell you that it is bad to buy a car on credit, period the end. They will tell you to do the one car lifestyle until you save the money, or take public transportation, or something. To them I say: I did it. For 2 ½ years. It SUCKS! It was okay in Columbia. In a small town, I would consider doing it again. In a big city, no way! I got up at 4 am to take Alann to work, came home, went back to sleep for an hour, got up, went to work, came home, did some stuff, went to get him from the light rail stop at 9 or later (on school nights). He rode the bus from work home, from home to the light rail, light rail to school, and then reverse the process. It was awful. On days that he needed the car, it took me an hour and a half to get to work. (An hour longer than driving.) We wasted so much time and money it was ridiculous. His truck gets 15 mpg on a good day. We were putting $60 a week in gas into it. I fill my car every other week, he drives himself to work now, and to the light rail (he still takes it. It is free, thanks to the school). So I put this into the bad debt category, but I do view it as a necessary evil. I don’t want to finance another car, so once this one is paid off, I will continue making payments to myself, so that we can have the money we need when we need a new car.

Good Debt: This is my personal view on good debt. Some people will argue.

#1: Student loans. Should you get student loans if you don’t need them? Of course not! Could I have afforded my schooling any other way? Absolutely not. Could we afford Alann’s schooling any other way? Nope! Not a chance. Then why are they good? Mine are good because I consolidated right before the student loan interest rate bounced up 2% in July 06. My interest rate is 4.5%. I call that a good cheap loan. I will pay that for 10 years very happily. If I had more money, would I repay sooner? I don’t know. It would be awesome to be completely debt free, except for maybe a mortgage. They are all federal loans, no private loans, so there are no real surprises involved with them. And 4.5%. Can’t beat that with a stick. How much do I have? $17000. How does that compare? Experts say that you should 1) take no more than 1 years worth of schooling (check), and 2) take no more than you anticipate making the first year out of college (check). I managed to stick to both of these without even knowing them. What about other people my age? They are carrying close to $25000 on average. A lot of them have even more. Oh by the way, this $17000 does not take into account the $6000 my grandparents loaned me. I keep thinking I should start sending money, but I am pretty sure grandma would send it back, refuse to cash the check, or has totally forgotten about it. Maybe I should try it just to see what happens.

#2: Mortgage. How can this be good? My particular mortgage is good because it isn’t crazy. It isn’t an ARM. It isn’t for WAY more than I can honestly afford. Money is tight because of it. But money wouldn’t be any less tight if we rented. Plus, it is an investment in our futures. According to MSN’s Home Equity calculator, if we refinance, if we stay here 5 years, we will have roughly $50,000 worth of equity, assuming certain home appreciation values. Do I believe this? Not really. I will accept $30,000 though. Now, can I possibly save $30,000 for a down payment on our next house in that time frame? NO WAY! That is saving $500 a month. Even if we rented, cheaply, I don’t think we could do that. So yes, this mortgage debt is good, because of the return. It is strange because it is both an investment and a debt. I can’t think of any other kind of debt that can be categorized that way. Well, maybe student loans. But that is a stretch. Yes, you get more money with a degree, but honestly, I have a degree in Theater. Could I do the job I have now without it? Absolutely. Would I make the same amount of money? I think so.

1 comment:

Sonic Death Monkey!!! said...

Wow, we are playing with fairly similar debts currently.

Both mine and my wife's credit cards combined are about $7,000. We just bought $2000 worth of furniture same as cash. She luckily had her schooling paid for by her parents, but I made up for with with a staggering $47,000 in student loans. This was because I went into school with a ton of debt and didn't have enough money to pay rent on a place. And like you, an English degree really gives you nowhere to go in the career world. I'm applying for jobs I could have out of highschool. I can't wait to make enough money to feel the choke hold of debt loosen.