Good Riddance to “Good Debt”

If you sit through a couple learning seminars with various financial experts you might hear a couple of them say that there is such a thing as “Good Debt”. You will also probably hear these same speakers say that real estate debt and student loans are ok to keep around because the interest is tax deductable and you have an asset that is appreciating.

For most of us these types of debt are almost inevitable. It sure would be nice to pay for a house in cash or to get through college without a single loan but that is pretty rare. I am not saying it is impossible, its not! However, I do think it is a bit backwards to call this debt “good.”

Myth: Real estate debt is good because it is tax deductable.

The government saw fit to let you write off the interest expense on the mortgage you took out to buy your home. Did you know that they also used to let you deduct the interest expense on your credit cards? Gosh we should probably classify credit cards as good debt then too.

Here is my opinion – which would you rather? Reduce your tax bill because you spent a bunch of money last year or get to keep that money and invest in something that increases your income such as tax free municipal bonds. If you do the math, I think you will find that the increased income is more beneficial than the decreased tax bill.

Myth: Student loans are a necessity, the only way to pay for college to be independently wealthy or be broke as a joke.

The truth is that college can be paid for with diligent saving, scholarships, grants, and part time jobs. But let’s say that your parent just weren’t able to save for your college. There is still no reason to let your loans hang around for 20 years or more. You lived like a college student for 4 years, why not live like one for a few more after you get your first real job?

One of my good friends graduated from a private college with debt that could go toe-to-toe with the best of them. After continuing to live simply and sticking to a budget he has been able to pay off more than half of the outstanding balance in just two years. That’s no small feat! Now he is truly crushing the remainder and can even feel good about applying to graduate schools. Good work buddy!

What it really comes down to is this. How fast to you want to reach the pinnacle of the financial pyramid from last week. It’s all about financial independence. If you don’t owe money to anyone you can do… well, pretty much anything you want. Good debt, bad debt, toxic debt – call it what you want but let's be real. Imagine a month where you owed money to no one. Sounds pretty good to me.

Basics Are Simple But Not Easy

I have been getting a lot of requests lately to give some practical pointers on how the “average guy/gal” can improve their financial Wellbeing. There are quite a few people out there who just simply cannot say with any certainty that they feel confident about their financial future. The problem is that most people start thinking about their future before they address the problems today. Of course you can’t say that you feel confident about the future if you are worried about keeping your lights on today!

So to help people visualize the steps to financial Wellbeing and ultimately financial independence, I put together this very simple pyramid:

It is simple by design. I have said it probably a thousand times; we have a tendency to over complicate things! Notice that the base of the pyramid only has three steps: Emergency Fund, Debt Snowball and Budget. Here is what is means:

• Emergency Fund – This is the most important piece of Financial Wellbeing, I don’t care if you make $100 or $150,000. If you do not have an emergency fund you are in big trouble, guaranteed.
• Debt Snowball – To be able to truly think about the future you have to be in a position where you are not saddled with consumer debt. The debt snowball is a simple approach to getting out of consumer debt.
• Budget – If you don’t know where the money is going, you cannot fix the problem. A budget is a game plan, you simply cannot keep your spending in check if you don’t have a plan.

It really is that simple. The main issue for most people is that they start to build their pyramid in the wrong section. Have you ever built a sand castle? What happens if you do not have a nice strong base when you start to build up the structure?

It Crumbles!

Guys, if you start out focused on the middle section of the pyramid before you build the base – it won’t work! Too often do I meet people who have focused on retirement savings and other worthy causes that fall in the middle section, without even bothering to tend to the base of the pyramid. They end up with thousands of dollars in credit card debt because they had no emergency fund and their spending is usually out of control. This completely negates all the work they put toward retirement!

True Story:

I was sharing this exact concept with a group a few weeks ago. I had just started to wrap up and a particularly brave audience member in the back piped up. He said, “Sure this is straight forward and pretty basic, but its a lot harder than it sounds.”

He’s absolutely right! I can say with certain confidence that if you can master the three pieces at the base of the pyramid, you will achieve financial Wellbeing and ultimately financial independence. The fact is that these concepts are so integral to the whole of your pyramid that if you build a strong base the rest will fall in line.

These principals are simple but they are as hard as it gets. Remember, it is a narrow path that leads up the tall mountain to financial success. It will take diligence, determination and several doses of discipline to reach the top, but you can do it.

Website Says It’s OK to Walk Away – No It Isn’t by Stacy Johnson

Stacy Johnson from www.moneytalksnews.com puts out some really great content. Here is a fantastic article from the site today:

I recently got an email press release from a website that specializes in helping homeowners with something known as a strategic default: walking away from a mortgage, even when you have the ability to pay.

Here’s an excerpt from that email:

“They wouldn’t work with me at all, so they basically made the decision to take the property back.” – Jeff Horton (strategic defaulter)

(Website Name) client Jeff Horton opted to strategically default on his both his primary and investment properties in Florida late last year.   Horton’s property values had each decreased approximately $100K in equity.  He has been living mortgage and rent-free for the last 13 months.  After months of trying to work out a solution with his lender, rather than drown in Florida’s underwater housing market, he decided a strategic default was his best fiscal option.  It was a business decision.  Big lenders understand that if they can get away with paying only one person to sign up to 500 foreclosure papers a day they can make more profit.  Cue the robo-signing foreclosure auditors.

Bank of America, JP Morgan Chase, and Ally’s greedy lack of oversight throughout the foreclosure process is reminiscent of their irresponsible lending practices in the early 2000’s.  How can lenders question a strategic defaulter’s ethics when they themselves are breaking the law and cutting corners to make an extra dollar? Are these the same companies we directly deposit our paychecks with?  Horton feels as though his lender gave him no choice.

Since all next week I’ll be presenting a series that agrees with part of what’s in this excerpt – namely that some big banks and the law firms they employed did display a greedy lack of foreclosure oversight – I want to make it clear just how vehemently I disagree with virtually everything else contained in this release.

When you borrow money and put up an asset as collateral, the value of that collateral is irrelevant when it comes to repaying the loan. If it weren’t, any person who takes out a new-car loan should feel justified in defaulting on it, since that collateral drops in value by 15-25 percent the instant it’s driven off the lot. For that matter, anyone whose house has depreciated in value since this crisis began could use that logic to justify a better deal from their lender.

If you owe $500,000 on a house that’s worth $200,000, and see no hope of ever getting back to even, the math could favor walking away.  I can understand strategically defaulting – but I can’t understand how people like Jeff Horton, along with the author of this email, can in any way attempt to claim the moral high ground.

“They wouldn’t work with me at all, so they basically made the decision to take the property back… Horton feels as though his lender gave him no choice.” This is BS of the highest order. The lender isn’t under any legal or moral obligation to alter the terms of your original agreement just because the value of your collateral went south.  If that were true, the same logic would justify the lender coming back to Jeff Horton and demanding a higher interest rate and/or a higher mortgage balance if the properties he purchased had radically increased in value.

“How can lenders question a strategic defaulter’s ethics when they themselves are breaking the law and cutting corners to make an extra dollar?” Lenders who broke the law probably can’t question a strategic defaulter’s ethics – but those of us who live up to our obligations and play by the rules can certainly question the ethics of both parties.   

While it’s true that some banks have disgraced themselves yet again, pretending that these practices somehow justify defaulting on a loan you’re capable of paying is pathetic. Default if you must – like I said, I don’t blame you for that: it may well be the right thing to do.  And if it helps you sleep at night, tell yourself it’s the bank’s fault for not “working with you.” But don’t try to pass that off on me.

I once let a stock broker friend of mine convince me that I should buy $30,000 worth of a company that ultimately went to zero – and it was money I could ill afford to lose. Did I blame him? You bet – at least at first. But after I thought about it, I realized that it was me who was at fault. I was the one who was so greedy that I carelessly acted on his stupid advice, and as a former broker myself, I should have known better. And guess what? Now I do.

You’re the one who bought a house and/or investment property at the top of the market. Time to man up, Jeff Horton.

Leading Change – You Must Save Money

“To be content with little is difficult; to be content with much, impossible.” – Marie Ebner-Eschenbach

This post is the last of my series on leading financial change in your home. I think this post is one of the more important pieces of changing your financial picture, but the truth is that you really have to do all 4 parts in tandem. You have to be accountable, you have to want to change, you need a budget and you must save money.

Here is a nice little video from CBS  news with some tips for saving money:

I like to think I know my readers and I am fairly certain none of these tips really rocked your world. But if you already know all of the quick tips, why is it so important that you start saving?

Well it really comes down to one over-arching concept: It’s going to rain.

Some of you are in California where it rains twice a year and they cancel school when it does. But for the rest of us, precipitation is pretty much guaranteed monthly. Life and finances are the same way. One year it might be like living in Cali – only a couple car repairs and one trip to the urgent care. Other years it’s like Seattle – you better have a poncho because the hits just keep on coming.

A funded savings account will act like an umbrella when the storm hits. If you are embarking on changing your financial picture the first step has to be establishing an emergency fund. It might sound backwards but is the single most important thing you can do to ensure success.

For example, if you are trying to pay down credit card debt and an emergency comes up (which they always do) what will you do if you don’t have an emergency fund? Put it on the credit card! Which is completely defeating and you will likely quit your attempt at a change. Don’t let it happen to you!

It really is as simple as it sounds, pay yourself each month. Set up a payroll deduction to your savings account for $50 each paycheck and in less than a year you can have a nice starter emergency fund. If you want to change your finances, you have to start here.