Thursday, April 26, 2007

"Debt Avoidance"

Yahoo Finance has an article on "Getting Back in the Black." It offers the "Six habits for highly effective debt avoidance." Here they are:

1. Live below your means. I think my wife and I do this pretty well. I would say that the purchase of our lakehouse (which I plan to write about in the future) was a rather unnecessary move that definitely brought us a bit closer to living at our means. But I'm comfortable with our finances as is.

2. Absolutely pay bills monthly. Simple enough, but such a challenge for some. I recommend creating a monthly budget. We have done this and it really helps us stay on track. I do not track my monthly expenses like I would at my business, but my budget allows me to see approximately how much I should be squirreling away each month. I plan on sharing our budget in a future post.

3. Create an emergency reserve. This is something that we have not done, and I frankly don't have any plans to. This may seem shortsighted, but a.) emergencies don't happen all that often, so I don't want to have cash idly sitting by earning a paltry interest rate for me, b.) if an employment related emergency comes up, I am a CPA and will be able to quickly earn some money, and c.) if such an emergency comes up, it will be covered by our Home Equity Line of Credit.

4. Use credit only with a plan. My debt is all real estate debt, and I plan to keep it that way. Some folks use the tactic known as Apporama to earn interest off their multiple credit cards. I will not waste my time with this. Precious time is much better spent, IMHO, and I do not wish to damage my credit score over a few thousand dollars. Now, as far as debt, you'll see from my balance sheet (previously posted) that we have three mortgages (house, apartment, and lakehouse), and a Home Equity Line of Credit at $46,000. Half that HELOC balance is for the 20% downpayment we made on the lakehouse back in October 2005. The other half was for the purchase of our Honda Odyssey (expanding family, we felt like we needed a minivan. Don't knock it, this vehicle is awesome!). My viewpoint is that the minivan debt is the only "bad" debt I have. And at least it's in a HELOC where the interest is tax deductible. We have no credit card debt, and we never have. In six years of marriage, we have never failed to pay off our credit card balance each month. YOU CAN DO THIS TOO, and I highly recommend it for obvious reasons. And we both came into our marriage in December 2000 with not only no credit card debt, but no student loans or debt of any other kind. Lucky us on the student loans.

5. Get family committments. Be on the same page as your significant other. I am very very lucky in this regard. I handle our finances, I do it well, and my wife trusts me. Plus, she is not a shopaholic or anything like that. Frankly, I make more discretionary expenditures than she does - I go out for lunch more often, I go to Starbucks several times a week, etc. But this is critical - you must be able to sit down with your husband or wife and chart out your financial future in real terms that make sense to everyone. Financial discord will lead to financial disaster, and then to marital discord.

6. Reward results. I am probably better at this than I should be. But seriously, you gotta live your life! Should we have purchased that lakehouse? The smart financial answer is no. But I cannot tell you how much joy it has brought into our lives, and we don't even make it down there as often as we should. The place is 35 miles from our house - not bad! But we've been so darn busy getting ready for baby #2 (6/15/07, the countdown is on). I can tell you that I am 100% comfortable with that purchase. If, in retirement, I need to sell the place, I will. I do not predict that I will need to sell it. I am 36, and my wife is 33. I predict we will have plenty of money by the time we're in our 50's. As I previously alluded to, I do reward myself with lunches, Starbucks, and wine. We don't really buy clothes, or go to expensive plays, theatre, or sporting events. We like to dine out. Long story short, I am not overly frugal, but I am smart with our money, and I demand of myself one thing - hit my financial goals each year. In 2007, we started out with $187,000, and I demand a 20% increase in that by the end of the year - that would leave us at $224,400. As of last night, we're at $207,000 (what a market!). If I can it 20% a year without fail, we will be just fine. Live a little!

The article cites Peter Sander, author of "The Pocket Idiot's Guide to Living on a Budget." He says "It's all about awareness, commitment and control." Weave all six of these above points into your personal financial life, and you should be financially, emotionally, and spiritually happy. That's a recipe for future financial independence.


KMC said...

I guess I'm not the only PF blogger who doesn't do credit card arbitrage after all.

Q said...

I understand how hard free money is to resist, but it's truly not free. There is a cost to wrecking your credit score, I think.

I brought this idea up to my wife, and she commented that you really have to be on top of all of the cards in your credit card collection. One wrong move, and you've potentially wiped out your profits and done real damange to your credit score.

My time is limited - I'd rather spend it researching stocks and playing with my little girl.

Others seem to have this thing nailed down and don't mind the credit score damage. It's all good.

moneymonk said...

Good post Q

Me and my husband have no credit cards. The only debt we have is the house. I came into the marriage with a student loan debt. I was thing to take out a HELOC and pay this off. But the interest is 4%, therefore I did not bother.

Once we pay off the student loan debt. I believe the REWARD will be very well. More money to save and invest.

on a side note: cc arbitrage as you said is a waste of time.

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