Why Debt Welchers Are Admired

Greek Crisis, Santorini Church

Santorini, Greece

By voting “NO,” the Greek people have rejected austerity measures by the EU in order to receive bailout money to pay off their debts. It’s as if Greece gave a big middle finger to the EU!

It’s great that at least the people were able to vote on their future. You can see the jubilation in their eyes after the results were announced. However, the immediate consequence of the vote is an enormous amount of economic pain as foreign investors pull out, the stock market crashes, banks stop lending, retirement savings get trashed, and unemployment soars even higher. Ah, the sacrifices we make to stay free!

Unfortunately, all of us investors who have nothing to do with Greece will suffer as well. If you haven’t reviewed your asset allocation this year, I highly encourage you to do so today. The US stock market could easily correct by 10% as capital flees riskier asset classes.

The Greek people are not completely to blame for their economic woes. They simply operated in the confines of an inept government that promised too much. Voting for a politician who promises to give you a tax cut or allows you to retire by 50 with a lifetime pension makes logical sense. Who wouldn’t vote for such benefits?

Despite the upcoming difficulties for the Greek, we can look on the bright side. With close to a 200% national debt to GDP ratio, the Greek have been able to live way beyond their means for a very long time. And if you can get a debt haircut when it’s finally time to pay up, then all the better! Surely Portugal, Italy, and Spain are thinking of ways to gain more favorable debt terms with the EU as well. 

Does A Good Credit Score Really Matter Anymore?

Does a high credit score matter anymore? Most don't careA couple mortgage refinances ago, I almost screwed myself because I had an $8 judgment against me from my local utility company that crushed my credit score by ~100 points. I thought I had an excellent credit score of 780, and I did, when I first started my 100 day refinance hell. But when my refinance bank pulled my credit report again around the 90th day, my TransUnion score plummeted to 680.

My mortgage refinance was delayed by another 10 days as my bank investigated the situation. Thankfully, everything turned out fine in the end. Since that time, I decided to regularly check my credit score once a year like I check my latest insurance coverage and health coverage. It’s good practice given it’s estimated about 5% of credit reports have errors as well.

Given I finally got rejected from my latest mortgage refinance attempt by Chase, I’ve begun to question whether a credit score has any meaning anymore. You see, I never missed a mortgage payment on this particular mortgage, and my latest credit score showed a 787. Anything above a 740 is considered excellent, and good enough for the best rate by major lenders.

The Financial Samurai Podcast Episode 2: Is Paying Down Debt Considered Savings?

Financial Samurai PodcastA reader asked on my post, The Average Savings Rates By Income, whether I consider paying down debt part of my personal savings rate calculation. My immediate thought was yes, but I realized I haven’t been including debt pay down at all when I discuss my after-tax savings rate of 50%+ in various posts on Financial Samurai.

Here is the outline of today’s 17 minute podcast.

Why I Don’t Include Paying Down Debt In My Personal Savings Rate

1) Be conservative. Don’t rely on anybody or any organization to survive. There are a lot of broken promises out there.

2) You don’t reward yourself for doing something bad. Punish yourself instead.

3) Compartmentalize your money. No co-mingling of funds.

By the time you retire, if your property is paid off and you get social security and your 401k then fantastic. If not, then you’re still OK, because you never expected anything from anyone in the first place.

The only time I would consider including paying down debt as part of my personal savings rate is when I pay extra principal down on my primary mortgage. The extra principal pay down could have been used for other wealth-building activities, so including it should be OK. The thing you want to be careful about is being house rich, and cash poor. There’s a balance you’ve got to carefully work out over the years.

Readers, Do you include paying down debt in your personal savings rate? If so, what are the reasons why?

Speaking notes: I appreciate everybody’s feedback from my first podcast entitled, Genesis. About 60% of you seem to want shorter podcasts, so I’ve decided to produce a much shorter 12 minute podcast and see how it goes. In terms of speed, pitch, and tone it doesn’t look like I have a problem based on your comments. But I’ve sped up my speaking speed in this podcast to test. A couple of you mentioned I should be more enthusiastic in delivery and not be afraid of laughing at my jokes. The style I’d like to emulate are the shows from NPR where no matter how crazy the subject, the speaker stays within his zone. I like NPR’s style, so that’s what I plan to go with for now.

To listen to the podcast, click Play to have it play within the post. You can also download the podcast onto your computer or phone by clicking Download. If you don’t see the options in e-mail, click the title of this post to come to my site. 

Related posts:

Use FS-DAIR To Decide On How To Pay Down Debt Or Invest

The Recommended Net Worth Allocation By Age And Work Experience

Recommendation To Build Wealth

Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

The best feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.

Finally, they recently launched their amazing Retirement Planning Calculator that pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future. Personal Capital is free, and less than one minute to sign up. It’s one of the most valuable tools I’ve found to help achieve financial freedom.

Pay Down Debt Or Invest? Implement FS-DAIR

Financial Freedom In America

Invest In Your Future America

The decision to pay off debt or invest is a personal one that depends on a lot of factors: risk tolerance, your number of income streams, liquidity needs, family expenses, job security, investing acumen, retirement age, inflation forecasts, and bullishness about your future in general. I’ve had hundreds of people ask me this question over the years, and I’ve also struggled to figure out a good guideline for myself.  As a result, I’ve been racking my brain to figure out a viable solution that can be used by many.

The solution I’ve come up with is called, “Financial Samurai’s DAIR” or “FS DAIR” for short. The idea is to come up with something easy to remember, challenging, logical, and effective, much like the 1/10th rule for car buying to help folks maximize their wealth. Even though plenty of people have objected to my 1/10th rule for being too restrictive, I strongly believe the rule has helped people minimize financial regret and boost the incredible feeling of progress and financial security.

Since we are all CFOs of our finances, we need to figure out the most efficient use of capital. My goal is to make personal finance simple so ACTION can be taken. All talk and no action leads to nothing. I’d like to “DAIR” you to follow my debt pay down rule to achieve financial freedom sooner, rather than later.

Steps To Get Out Of MASSIVE Credit Card Debt Due To Lifestyle Inflation

Lifestyle inflation and a mega yachtI don’t discuss too much about credit cards on Financial Samurai because I’ve only got three (a travel rewards card, a generic rewards card, and a corporate card) and nothing much happens except for racking up rewards points. Definitely use a credit card for convenience, safety, rewards points, and insurance protection if you can control yourself. But if you’re not careful, thanks to the ease of use and absurdly high interest rates, problems may ensue.

The following is a guest post by Debs, a middle income earning new grandmother who was able to amass over $140,000 in credit card debt! I asked her to share her story on how she did it, and how she is getting herself out of debt. Kudos to Debs for having the courage to share her story.

It’s embarrassing to admit, but I tell this tale as a warning to all people like me who are on the bandwagon of lifestyle inflation, “I deserve” and family struggles that may cause you to take your eyes off the ball and wake up one day to say “How did I get here?”.

We weren’t addicted gamblers or smokers. We didn’t have a lot of fancy toys. We drank moderately and yes, we had four kids and a large home to boot (purchased in 1991). Maybe a few travels thrown in here and there, but not excessive. There was some shopping for work clothes and things for our home. Maybe a bit of stress relief shopping, but nothing extravagant. That is my first message.

Our debt crept up on us without even realizing it. At least I didn’t realize the size it had grown to. I wasn’t watching the finances. I was only working hard to contribute to the family income. That was enough, or so I thought.

How Much Is The Average Credit Card Debt Per Household?

Average Credit Card Debt Per Household

How many times have you withdrawn a wad of cash only to see it disappear a few days later with little idea where it all went? By putting as much expenditure on my credit cards as possible I get a handy dandy pie chart and expense line breakdown at the end of every month to see where my money is going. Furthermore, I get all those juicy rewards points that really begin to rack up over time.

The average household owes $15,191 based on data from the Federal Reserve and Nerd Wallet, a credit card lead generator. They also throw out a $7,191 number for average credit card debt for “non-indebted households.” According to the Experian Intelliview tool, the average credit card balance per consumer was $3,779 in 1Q2013. However, consumers with low credit scores – like a “D” in the VantageScore range – had average credit card debt of $5,965. Finally, according to CreditCards.com the average credit card debt per U.S. adult, excluding zero-balance cards and store cards is $4,878. The average debt per credit card that usually carries a balance is $8,220. And the average debt per credit card that doesn’t usually carry a balance is $1,037 (must equal spend).

It’s hard to figure out what’s the right number because they seem way too high and all over the place given the median household income is around $51,000. One way to finding a better average credit card debt and spend number is to simply get more datapoints with a short four question survey below.

The impact on the amount of average revolving credit card debt per household is largely determined by income. You might have an astounding $15,000 in revolving credit card debt, but if you are making $1 million a year, who cares? The more pertinent measure is average revolving monthly credit card debt to average monthly gross income.

What’s confusing is that it’s unclear whether people who pay off their credit card bills every month are also included in the average credit card debt per household. After all, when I charge something on my card, I have interest free debt for 28-31 days, depending on the month, until I pay the bill off in full. The solution is to simply calculate the average credit card spend a month to the average monthly gross income, and calculate the average revolving credit card debt a month to the average monthly gross income to get a more thorough picture.

From Debtor To Millionaire: How A Windfall Changed My Life

This is a guest post from J.D. Roth, who founded the blog Get Rich Slowly in 2006 and is the author of Your Money: The Missing Manual. I first met JD four years ago for lunch up in Portland when I was still working. By that time, J.D. was already a mini-celebrity in the personal finance world through his story telling abilities and topical focus of paying down debt and living a more frugal lifestyle. We came from opposite ends of the financial and topical spectrum, but as fate would have it, we’re in pretty similar boats now.

I admire J.D. because he is a “blogging purist” – someone who writes for the love of writing first, community second, and income a distant third. Instead of an interview, I asked J.D. to share his story of how he went from debtor living paycheck-to-paycheck to financially free in just a few short years. His latest project is a year-long course on how to master your money, which explains how to slash costs, properly budget, and boost income so that you can pursue early retirement and other goals. Please enjoy this great post about struggle, loss, change, and love. 

In The Beginning

My parents

I’m a lucky man, and I know it. But for a long time, it sure didn’t seem that way.

When I was a boy, my family was poor. We lived in a single-wide trailer house in rural Oregon. My father was often out of work. When he was unemployed, things were rough. We never went hungry, but sometimes we came close. More than once, we were bailed out by the kindness of other families in our church.

We didn’t always struggle. Sometimes my parents had money, at least for a little while. You see, my father was a serial entrepreneur. He was always starting businesses. Even when he had a job selling boxes or staplers or candy bars, he had something going on the side. Most of his businesses failed, but some succeeded.

In 1977, my father sold one business for $300,000. He was supposed to receive $5000 per month for fifteen years, which seemed like a lot of money at the time. To celebrate, he went out and bought an airplane, a sailboat, and a Kenwood stereo. Life was good — until the buyer went bankrupt. Because he hadn’t saved anything from the few payments, Dad was broke again. And unemployed. We were right back where we’d started.

This “famine or feast” pattern continued throughout my entire childhood. Most of the time, it was famine — not feast.

In the late 1980s, I went away to college. Because I knew my parents couldn’t help me pay for school, I took care of things myself. I was a good student with a lot of extracurricular activities: president of the computer club, national competitor in Future Business Leaders of America, editor of the school literary magazine, and so on. Plus I had terrific scores on the the PSAT and SAT. As a result, I earned a full-ride scholarship. I worked two or three or five jobs to pay for housing and to earn spending money.

During college, I developed a spending habit. In order to keep up with my friends, many of whom seemed to be rich (as I defined it at the time), I used credit cards. I began to carry debt. At first, I only owed a few hundred dollars, but by the time I graduated with a psychology degree, I had a few thousand dollars in credit-card debt.

After college, my debts continued to mount. I bought a new car. When I had money, I spent it. When I didn’t have money, I still spent it. By the middle of 1995, just four years after I’d graduated, I’d accumulated over $20,000 in credit-card debt. It got worse. In 2004, my consumer debt topped $35,000. I felt like I was drowning. (See: How Many Credit Cards Should I Have Until It’s Too Many?)

The Best Strategies To Get Out Of Debt And Become Happier In The Process

Out of debt with not a care in the worldI graduated from business school in 2006 with roughly $55,000 in student loans. Although $55,000 is a lot to pay off, I was already a “debt veteran” by then. What’s another $55,000 in student loans when I was already leveraged over $1 million dollars to buy my first properties in 2003 and early 2005?

I didn’t need to take out student loans, but I decided to conduct some financial arbitrage. The maximum amount one could borrow through a Stafford Loan at the time was $18,500 a school year at an interest rate of 2.75%-4%. I took out the maximum amount at the beginning of each school year to pay for tuition while I received 100% tuition and books reimbursement at the end of each year from my company to reinvest in the markets. 2003-2006 was a time of recovery in the financial markets and I figured I could beat a 2.75%-4% annual return.

Even though the financial services industry was going through retrenchment during the time I attended business school, the S&P 500 was doing quite well (2003 +28%, 2004 +11%, 2005 +5%, 2006 +16%). Even long term CDs were yielding roughly 4% risk-free. The extra $18,500 invested in the stock markets each year did end up growing faster than the cost of debt until a year after I graduated.

I was feeling proud of myself for the financial arbitrage until the 2008-2009 massacre hit. Originally, I was planning to continue holding on to my 2.75% consolidated loans to reinvest in the market. But when the markets got rocked, the loans started feeling like a burden instead of a gift so I wrote a check and paid everything off instead. I was overly focused on making an extra $3,000-$10,000 a year on my arbitrage rather than focus on the big picture of my overall net worth. It feels better to have less debt during times of crisis, however in retrospect, it would been better to lever up even more to buy more stocks!

Debt is the opposite of generating passive income for financial independence. Debtors are helping make someone else’s financial goals a reality while digging themselves further down a dark hole. The only type of debt I like is primary mortgage debt given there’s a good chance the underlying property will appreciate in value over a long enough period and you’ve got to live somewhere. There’s never a financial return for renting. Furthermore, the tax benefits of mortgage debt under $1.1 million dollars is also a nice bonus to have.

In this article I’d like to provide a debt framework that will help you get motivated to get out of debt. But first let’s understand the why.

WHY WE GET INTO DEBT

The Reality Of How People Get Into Debt – It Just Creeps Up!

Clown From Movie IT I am an opponent of consumer debt because the interest rates that credit cards charge are usurious when compared to the government bond yield of ~2.8%. If you are going to use a credit card, please pay it off in full every month or you’re just lighting your money on fire. This ain’t Vegas where everybody is making it rain in the clubs you know!

We probably shouldn’t be living it up while still deep in consumer debt if we want to achieve financial freedom. But it’s just so hard when we’ve got our parents, government bailouts, rich friends, and wealthy spouses who will take care of us if we go overboard. Paying $4 an hour for parking with my credit card doesn’t feel so bad. But when I’ve got to load up the meter with 16 quarters, damn, what a ripoff! It’s only natural to want what other people with means have, so we spend since it’s so easy.

One of my readers called me out on my assumption that indebted consumers consciously spend beyond their means. Is it so bad for me to assume a mugger isn’t threatening to chop off your pinky if you don’t buy yourself $1,000 Christian Loubotin pumps or a $8,000 Panerai Submersible watch? I think so, but here’s a fantastic perspective by “GetAGrip” which I thoroughly appreciate.

DEBT CREEPS UP ON YOU LIKE A CLOWN IN THE GUTTER 

Should We Still Be Spending Money And Having Fun While Deep In Consumer Debt?

Anthony Weiner Speaking At Rally In NYC

Anthony Weiner too stubborn to quit. NYC 2013.

During the depths of the financial crisis, one of the proposals I sent to the Obama administration was to institute spending curbs based on high school or college grade point averages. It didn’t matter whether you went to Community College or UC Berkeley since everybody’s circumstances are different. What matters is how well you did in school to justify want based spending as opposed to need based spending.

For example, if you were a D+ student (sub 2.0 GPA out of 4.0) you are only allowed to buy generic clothing and ride public transportation to work for the rest of your life. No car or lollipops for you. If you were a B student, then suddenly that new $20,000 Honda Civic is available to you after the dealer scans your ID to check the government GPA database. If you are an A student, then you are free to buy whatever you want because logic dictates that if you are smart enough to study hard in school then you are smart enough to practice good financial habits.

I was shocked Obama never acknowledged my letter because my proposal would only help the government expand their authority (think PRISM) over the people of this great nation. We voted for Big Government and I wanted to support the cause as much as possible as I figured out a way to go John Galt. Although Washington DC stayed silent, fellow patriotic Americans voiced their opinions in the comments section of the post, Tax Rates Based On Work Ethic Shall Fix The World. It’s all about creating incentives.

Just imagine a world where everything is rational. Imagine everybody reading their mortgage contracts before signing so that they are aware of their financial obligations instead of blaming others when they can’t pay. Imagine if everybody adopted the attitude of not deserving something until worked for? Now imagine a country where everybody is middle class and pitches in to support our country. There would be no socioeconomic warfare, just equality. We can always dream right?

DO WHAT YOU WANT WITH YOUR FINANCES, JUST DON’T HURT OTHERS