Debt Archives

Ranking Debt Types From Worst To Best

Updated: 10/09/2021 by Financial Samurai 27 Comments

Ranking The Best Passive Income Investments helps you strategize on developing retirement income. Over the years, the rankings have changed because economic situations have changed. In this post, I’ll be ranking debt types from worst to best.

When used appropriately, debt can help provide for a better life and make us wealthier. When used inappropriately, however, debt can destroy our lives.

The key is to always use debt in a way that positively helps get us to our financial goals in an as risk-appropriate manner as possible. In this incredibly low interest rate environment, the use of debt is going to increase.

Therefore, I think it’s important to come up with a framework for ranking debt today. We must be careful with our debt usage, especially during this time of uncertainty.

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Sad Stories About Lending Money And Not Getting Paid Back

Updated: 12/08/2021 by Financial Samurai 35 Comments

Here are some sad stories about lending money and not getting paid back. In general, I am against lending money to people you care about. These include lending money to friends and family. Don’t do it unless it’s a life or death situation. Give the money instead.

Lending money to friends, family, and strangers is a tricky situation. I’ve argued why you should never ask to borrow money from friends or family. If you do, not only would you sully your honor, you will disappoint your parents, and potentially lose your friends.

If you do end up borrowing money from friends and family, my assumption is that as a Financial Samurai, just like a Lannister, you will always pay your debt back in full.

But this is the wrong assumption because some people simply have no honor. They are the takers in this world who mainly think about themselves.

If everybody honored their debt obligations, there would likely never be a financial crisis that destroys the wealth of millions. However, as we all know, crazy things happen all the time.

Bad lending outcomes is one of the main reasons why I rank P2P lending as the worst passive income investment.

I’d like to share several sad stories from Financial Samurai readers who lent money in good faith. Neither of their stories ended well. However, there are some great lessons.

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Debt Optimization Framework For Financial Independence

Updated: 09/06/2020 by Financial Samurai 72 Comments

In order to achieve financial independence, you must properly manage your debt. Here is a debt optimization framework to help you do just that. But first, let’s discuss why we get into debt.

Why We Get Into Debt

Most of us get into debt because we WANT something we cannot afford. Instead of sending our kids to public school, we want a private school education. Therefore, we borrow $50,000 to learn something we can learn for free on the internet.

In our 20s, we want to live a fabulous lifestyle. Therefore, we put everything from fine dining to designer clothes on our credit cards.

In our 30s, we are sick and tired of paying rent. Therefore, we leverage up 7:1 to own a property that will crush our finances if we need to sell in a down market. Follow my 30/30/3 rule for home buying instead.

Make no mistake about it. Debt is a manifestation of greed. Which means I’m one greedy bastard! I wanted to live a nicer lifestyle and I wanted to get rich as young as I possibly could. In my 20s and early 30s, the biggest risk I feared was not taking enough risk.

Some of you might be thinking you aren’t greedy for having debt. But deep down, you know what I’m saying is true. Not only are you greedy, you’re impetuous to boot. But don’t be ashamed. If managed properly, greed can often be good when it comes to reaching financial independence sooner.

In this post, I share with you my debt history followed by a debt optimization framework to help you build wealth faster while minimizing the chances of a financial blowup.

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Mortgage Refinance Strategies And Points You Should Understand

Updated: 03/11/2021 by Financial Samurai 22 Comments

Congrats on being a homeowner! Real estate is one of my favorite asset classes. Over the past 15+ years I’ve owned seven properties and have done multiple mortgage refinances. There are several mortgage refinance strategies and points I’ve learned along the way that have enabled me to save significantly. I hope my tips below can also help you save a lot of money with your refinance process as well.

The Mortgage Refinance Process

I remember back in 2011 how happy I was when my primary residence mortgage refinance was completed. It took 8 weeks from start to finish.

The process took so long that I actually forgot I was refinancing my mortgage until the bank called to ask when I could meet the notary to sign all the documents.

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Why Debt Welchers Are Admired: Hypocrisy At Its Finest

Updated: 08/31/2020 by Financial Samurai 86 Comments

Greek Crisis, Santorini Church — Santorini, Greece

In America, debt welchers are admired, and that’s a problem. Let me explain how adopting an attitude of not paying back your debt will lead you to less wealth and more unhappiness.

I’ve always grown up believing that taking on too much debt is a bad thing. What’s even worse is taking on debt and not paying back your lender. Whether the lender is an institution or a relative, paying back money lent you in good faith is an absolute must. They trusted you. Not paying them back is not only selfish, but highly dishonorable.

But when the worst punishment given to people who break their debt promises is a bad credit score or a garnishment of wages by the IRS, it’s not surprising that not paying off debt is becoming as common as spanakopita. Do garnished wages even count as punishment, since you’re simply paying back what’s owed? We’ve already discussed how a good credit score doesn’t really matter very much anymore!

People Who Pay Their Debt Are Fools

The more I think about it, the more it seems like people who keep on paying their debts during bad times are fools. Deep down, I think all of us who keep on paying our mortgages, student loans, and credit cards when we’re hurting for money know we are being silly since there are so many bailout programs available for those who don’t.

When my Lake Tahoe property got crushed during the financial crisis, the smart economic thing to do would have been to stop paying my mortgage. California is a non-recourse state where lenders can’t come after your other assets to be made whole if you default on your primary residence. They can if you default on a rental or vacation property. Throwing good money after a bad investment is generally not a good thing to do. But I feared humiliation.

Instead of letting my property go, I sank another $100,000 in mortgage payments over the next three years until the storm finally passed. Luckily, out of the blue, I was able to get a loan modification to help with the expense. Otherwise I would have spent even more. Today, I still own the vacation property.

Why Are Debt Welchers Admired?

The reason why debt welchers are admired is because they have the GUTS to say F&*# Y*$ to their lenders and not give a crap about what other people think of them. I’m sure every one of us who owes money has thought about not paying back our debt, especially when money becomes tight.

But most of us are too chicken shit to actually stop returning all forms of communication with our lenders. We’re too worried about our reputations, our careers, and our safety. Who wants to be in fear of opening the door one evening to a debt collector with a baseball bat?

Nobody rewards people who do what they are supposed to do. That’s like giving a trophy to someone who shows up for work on a Monday and Friday. What gets rewarded is doing what you’re not supposed to do, like not paying back your college loan or strategically defaulting on your mortgage.

I’ll prove to you why having poor financial habits are actually admired with several examples below.

People Default On Student Loans Because They Can

If it was so bad to default on your student loan, the New York Times wouldn’t publish an editorial on why those with student debt should default without a balanced rebuttal.

Lee Siegel, the writer encourages people to default because he wasn’t born wealthy. He writes,

“I have found, after some decades on this earth, that the road to character is often paved with family money and family connections, not to mention 14 percent effective tax rates on seven-figure incomes.”

Lee’s other reason for encouraging people to default on their student loans is because other people are defaulting or committing financial crimes.

“Tax fraud, insider trading, almost criminal nepotism — these won’t knock you off the straight and narrow. But if you’re poor and miss a child-support payment, or if you’re middle class and default on your student loans, then God help you.”

There’s over $1 trillion in student loan debt outstanding, a level much larger than the amount of credit card debt owed by consumption-loving Americans. Plenty of people owe student debt, which is why plenty of people are rooting for Lee’s message! We want student loan forgiveness, and we want it now!

The New York Times, one of the most venerable media institutions in the world, is implicitly supporting student loan defaults by running this editorial without responding with a well thought out counter argument. Is this not financial irresponsibility given the next financial crisis will likely be the result of student loan debt defaults? Guess not.

Strategic Mortgage Defaulting

Carl Richards, a certified financial planner and writer for The New York Times strategically defaulted on his mortgage when he owed $200,000 more than what his home was worth in 2010. He could have kept paying the mortgage like his friends did, but he chose to let the rest of us pay his mortgage instead.

The public likes to blame banks for the housing crisis. Oh those evil banks who provided capital for thousands of people to live the American dream. What happened to blaming the people who decided not to pay their mortgages instead? If everybody paid their mortgages, there wouldn’t have been a financial crisis.

If defaulting on your mortgage was bad, why would Richards still be paid by the New York Times as a columnist, a job that very few people can get? If defaulting on your mortgage is seen as a poor financial move, why is Richards making money from a couple books he published about how to be smart about your money?

Clearly the publisher sees an opportunity and recognizes that debt welchers are an asset. Finally, if defaulting on your mortgage is so bad, why would he be invited to be a keynote speaker at a conference?

The rational answer is that defaulting on your mortgage is not considered bad. Defaulting on your mortgage can give you a unique story as a CFP who is supposed to know what he is doing with his money.

People love a good story. The key is to hang a lantern on your problems and profit from your mistakes. Even if you end up making millions after strategically defaulting, you still don’t have to pay the debt back.

Bad Money Management Can Make You A Presidential Candidate

Sen. Marco Rubio, R-Fla is a star on the rise despite his poor money habits.

The New York Times reports,

“An analysis of his financial disclosures by Jude Boudreaux, a longtime financial planner and an adjunct professor at Loyola University New Orleans teaching personal finance, shows that Mr. Rubio earned $2.38 million from 1998 to 2008 but ended up with an estimated net worth of $53,000 (slightly more than Mr. Rubio disclosed himself). His savings rate during that period was about 2 percent.”

So where did all that money go? Well, he bought a $80,000 boat despite owing $150,000 in student loan debt and $30,000 in credit card debt. He then leased a $50,000 2015 Audi Q7, despite disclosing he had liquidated $68,000 in his pre-tax retirement account, which cost him an estimated $24,000 in taxes and penalties.

Then it was reported by the New York Times that Rubio used a Republican Party credit card for personal expenses –to cover a trip for a family reunion and to pay for stone pavers at his home in Miami. Bad money management is one thing, but using Party funds for personal use is a no-no, especially for elected officials.

It’s OK to be bad at managing money. If it weren’t, then Senator Rubio wouldn’t be Senator, and he wouldn’t be a candidate for POTUS. We know about the temptations of credit cards and buying things we can’t afford. Nobody is really going to fault you for poor financial decisions. We’ve ALL made them, most certainly including myself. The key is to just learn from our mistakes and move on.

Learning from our financial mistakes is exactly what Marco Rubio is doing. My only advice to him is to drive a less expensive car, because since he’s still in so much debt, the media will attack him relentlessly for all his toys.

Debt Welching Is Rational

Country Debt To GDP Ratio Chart — Every country is borrowing more money

If welching on debt was frowned upon, there would be greater punishment than simply getting a bad credit score or having your future wages garnished. The level of debt welching would drastically decline if we had a system where each finger would get chopped off after being more than 90 days late.

Instead, debt welchers are seen as heroes because they do what most of us dare not do, break our promises. Getting someone else to pay for our mistakes, and allowing us to reap the benefits when things go right is one of the smartest ways to build wealth if you can get away with it.

Everybody will screw up their finances at some point in their lives. And no matter how bad we screw up, there’s always forgiveness if we stay humble and try not to repeat our mistakes. We are OK with bailing each other out at least once, because we might need our own bailout some time in the future.

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Recommendations For Debtors

Refinance your mortgage: Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Interest are at all-time lows. Take advantage!

Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Updated for the new decade.

Never Ask To Borrow Money From A Friend Or Family Member

Updated: 08/15/2021 by Financial Samurai 77 Comments

Never ask to borrow money from a friend or family member. If you do, you’re likely asking for trouble. You might no longer be friends once money is involved.

When it comes to money there are a couple rules I encourage people to follow.

The first rule is: Never tell anybody how much you truly make. You can share a portion of what you make, but not the entire number. Be particularly careful if your income is more than 50% higher than the median or average income for your age. A portion of people can’t help but become envious and despise you if you make more than them.

The second rule is: Never ask to borrow money from friends and family. As soon as you ask to borrow money from friends and family as an adult, you lose their respect and honor for you. And if you are a Financial Samurai, you value respect and honor above all else. Asking to borrow money from the people you care about can lead you down a deep dark hole.

Let me share with you a short story about how one man asked to borrow money from his close friend and girlfriend and what happened after. I’ll also share with you reasons why asking to borrow money is one of the worst financial moves you can make.

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If The Economy Tanked, Would You Be Ready?

Updated: 12/01/2020 by Financial Samurai 26 Comments

Right before the pandemic began in 2020, the question I posed for all of you was: If the economy tanked, would you be ready?

I asked this question before 2019 was an extraordinary year for returns. Something bad was bound to happen, and it did! Let’s do a post-mortem and review of this post, sponsored and written by Credible, one of the leading lending marketplaces today.

If The Economy Tanked, Will You Be OK?

The U.S. is in the midst of its longest economic expansion in history.

But when the Federal Reserve cuts interest rates, that’s usually a sign that the economy is slowing down — or worse. After raising rates nine times from 2015-18, this year the Fed has reversed course, cutting the short-term federal funds rate three times.

Boom Bust Cycles

Another worrisome trend: New York Fed data shows the unemployment rate for recent college graduates (red line) has been inching upwards this year, suggesting employers are skittish about growth.

Unemployment rates for recent graduates, college graduates, and all workers

Booms and busts of the business cycle are pretty much accepted as a necessary tradeoff of our free-market, capitalist system — which has weathered seven recessions since the 1970s. At the very least, it is clear that growth is slowing in both developed markets and emerging markets around the world.

Most Felt A Recession Was Coming

In a recent CNBC/SurveyMonkey poll, nearly two-thirds of Americans said they think it’s likely we’re headed for a recession next year. Close to half of those who see storm clouds on the horizon are preparing for it by cutting back on household spending and paying down debt.

“This refreshing prudence on the part of the U.S. households is, of course, exactly opposite of what macroeconomists at the Fed — as well as incumbent politicians who view lower rates as enhancing their re-election prospects — want to happen,” says former FDIC Chairwoman Sheila Bair.

Rate cuts are designed to encourage people to borrow and spend. But this time, Bair says, “it looks like American households have learned their lesson, even if Washington has not.”

The downturn has obviously arrived in 2020 thanks to the coronavirus pandemic. It unfortunately came sooner than most of us had all expected. As a result, this post is more important than ever.

It’s always a good idea to constantly be managing any outstanding debt you’re carrying, whether its credit card balances, student loans, or a mortgage.

Make sure:

You’re not paying a higher interest rate than you can qualify for
Most of your monthly payment is going toward paying down principal, rather than interest charges
You’re prioritizing your loans with the highest interest rates
You have a good cash balance equal to at least six months of living expenses

Let’s look at some techniques you can use to whip your credit card, student loan, and mortgage debt into shape and get better prepared for the next recession. If the economy tanks, you want to be prepared.

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Paying The Average Credit Card Interest Rate Will Keep You Poor Forever

Updated: 08/06/2021 by Financial Samurai 29 Comments

The worst type of debt is consumer debt. And most consumer debt is paid for using a credit card. With the average credit card interest rate in the mid-to-high teens, consumers with revolving credit card debt are often stuck in a negative death spiral.

One reason why consumer debt is so bad is due to people buying things they really don’t need: a fifth pair of designer jeans, another luxury watch, every electronic gadget imaginable, and so forth.

But egregiously high credit card interest rates are the main reason why consumer debt is the worst type of debt for your finances. If you keep revolving credit card debt, you will likely stay poor forever.

Let’s take a look at the current average credit card interest rate.

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Child Millionaires: Not Necessary Thanks To Canceling All Student Debt

Updated: 12/23/2019 by Financial Samurai 144 Comments

One of the things many responsible parents are doing today is saving for college. Not saving for college and expecting a student loan bailout in the future is bad planning. The same goes for not saving for retirement and hoping the government will take care of you once you can no longer work.

Do you really want to take that chance? I don’t think so.

Given college tuition is rising by roughly 6% annually a year, by the year 2033, the cost for one year’s worth of public or private school tuition may approach $54,070 and $121,078, respectively.

Add on expenses for room, board, travel and miscellaneous stuff and the annual cost of college could easily be 50% – 100% higher.

Meanwhile, according to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years.

Therefore, it is only logical that all of todays’ new and future parents should try to save about $1 million for each child’s college education. If a family has a “trophy kid,” then the family should save $4 million and so forth if college is the desired path. Going into debt to buy a depreciating asset like a car or a college degree is fiscally unsound.

No parent should expect their child to be brilliant and get scholarships. Nor should any parent expect their child to be sensible and attend a public institution to save on costs. High expectations lead to disappointment.

No matter how many articles I write about the depreciation of a college degree, not enough people will listen because the desire for status is too strong. We also all believe that we are more talented and smarter than we really are.

Parents can hope for sensibility, but should still plan to spend the big bucks.

However, to save for our children’s college education often means that we are unable to save as much for our own retirements. This, in turn, may cause financial anxiety and unhappiness within the household.

Perhaps the Cancel Student Debt movement is a solution. Probably not.

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

Updated: 10/25/2021 by Financial Samurai 49 Comments

Want to learn how to get out of massive credit card debt? You’ll learn how in this step-by-step post.

I don’t discuss too much about credit cards on Financial Samurai because I’ve only got two (a cash back rewards card, and a cash back business 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 Financial Samurai reader, Debs, a middle income earning new grandmother who was able to amass over $140,000 in credit card debt! She was eventually able to get out of her massive 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 massive credit card 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.

Why We Got Into Massive Credit Card Debt

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