One of our readers asked us if we believe in the idea of being debt-free. We decided that would be the perfect topic for a vlog (embedded below). After you watch it, feel free to share your thoughts on the topic. Do you believe in living debt-free, or are there things for which going into debt is permissible?
Anonymous
Well said. Going into debt for a “toy” can quickly turn into resentment when the bills start piling up. I do agree about debt for education and a home. They say it’s better to have a mortgage than throw away your money on rent.
Dani
My husband and I are just finishing paying off our student loan debt. In the mean time we have added a mortgage. It may not be the nicest house, but it is one we can comfortably pay off. Since we locked in a 1% interest mortgage we invest our saving (average 10% return) rather than paying off our mortgage faster.
Anonymous
Been married for 44yrs., never had money problems. We live within our means. We had a house mortgage, new car payments and we have bought furniture with payments being interest free for a year. We always paid these things off within a normal time frame. My parents taught me that money doesn’t grow on trees.
Anonymous
No video shows up. Ad blocker doing its job? Anyway…
My rules for debt:
Control your spending. Don’t have debt that’s not secured. That means no credit card debt, but house debt or car debt is OK. Cars do depreciate, but houses usually appreciate and (for now) mortgage interest is tax deductible. Credit card debt can build up, and with added interest each month, is quite a trap.
Don’t use your money that’s making 10% (stock market investments, etc.) to pay for something you could finance for 3% (car, house). If you get a good mortgage rate, there’s nothing stopping you from paying the mortgage off early if you want. But you must decide between investing that extra money and paying down your debt faster – which is better for you.
Having open lines of credit with some debt, and paying on the debt properly, helps build a solid credit score. Watch your credit-to-debt ratio. (My credit score is 870, making car dealers swoon.)
Emergency spending should come from your savings, not be put on credit cards. Building your savings (liquid and long-term) is just as important as controlling your debt.
If you’re not sure you’re managing your money properly and saving enough for the future, talk to a fiduciary financial planner. Start young. You’ll wake up someday at age 60, and it may be too late then to fix things. BTW, people Ellie’s age are going to need at least $3M saved to retire comfortably. More than that will be better. Start saving, use Roth IRA’s if you qualify, and take full advantage of an employer’s IRA plan and matching funds. Get regular financial planning check-ups, especially if your financial circumstances change (job change, additional children, etc.).
Suzanne from Holland
I find it so strange that in the usa you need debt to gain a good credit score, so that you can borrow even more money. Here in the Netherlands, the more debt you have, the more difficult it becomes to get a (high enough) mortgage. It is also not common here to borrow money for a car. You buy the kind of car you can afford, or you use public transport. I know though that the latter is not alway an option in the usa. Credit card debt is also not common here, as most credit cards are set up in such a way that you pay of your debt directly the month after spending with you credit card.
Anonymous
Suzanne – You don’t need debt per se. You need a good ratio of available credit to debt. Say you have a credit card account that has a $10,000 credit limit, set by the card company, based on your past credit history. Of that $10,000 limit, you only charge $1,000 at most. That’s using only 10% of your available credit (ratio of credit to debt), and anything 10% or under is considered good use of credit and management of debt. When credit card companies see that you have a good amount of available credit, you keep your debt low, and your payments are always on time, it builds your credit score with the major credit bureaus.
People with no credit cards, no debt, and no history of timely payments sometimes have a hard time getting loans because they have no credit history. They are unknown risks, even if they’re debt-free and always pay cash. On the other hand, people with a $10,000 credit card that’s always max’ed out and never paid off or paid on time…well, they’re not always good people to give loans to, although some lending places will take those risks. The trick is to fall somewhere in the middle, as most people do – some established credit, some debt history, and some payment history. The better for you, the higher your score.
Make sense?
Suzanne from Holland
Thank you for your explanation, that does make sense! It doesn’t sound as bad anymore, but I still prefer the Dutch way 😉
Anonymous
I want to add insight from another European country. I live in Germany and the majority of the people I know had to take out a loan to buy a car. We have done both and would buy new with a loan again in the future. 1 because the interest rate currently is so low that that money is better off being invested. 2 the used car cost us more than double what we paid in the few years we had it. It was a decent car, but because of the regulations and inspections in Germany we were constantly making repairs .
anonymous
Interesting blog you have made to share your views.
Sounds like good advice. However I might encourage a young coyuple to go ahead and buy that big house with as many extra bedrooms and rooms as you can manage. Then start a rooming house. Then you can use other peoples money as your investment.
Anonymous
Running a boarding or rooming house is not for everyone. It’s not even allowed by code in some areas. Yes, you get income, but you also assume huge liability having non-family under your roof. You’d need an incredible amount of insurance, probably even an umbrella policy because of the extra liability. In the end, it may not be worth renting rooms.
anonymous
People would rather plan a missions trip than open their home and people would rather complain about the wall than open their home to others.
Anonymous
Oh! We’ve moved out of the water and onto the lawn with a baby!
Ellie
Haha, that’s true!
Lauren
Debt isn’t always a bad thing. I am a first generation to graduate with a bachelors degree on both parents sides of the family. My degree is in business and hotel and restaurant management. I didn’t have much help with college and had to take out loans. I am paying extra on them. I don’t currently own a home but I feel owning a home, if one can afford the payments, can pay off in the end. It depends on a lot. I have a credit card that I use for 90% of my purchase. I never spend more than I make. I use it for the cash rewards and to build up credit.
Anonymous
My husband and I have followed Dave Ramsey’s plan, so we definitely believe in living debt free (except the mortgage which we will start working on soon). Living in debt or paycheck to paycheck is just not worth it to us. Debt brings stress and money fights. I would recommend Dave’s book The Total Money Makeover to anyone who wants to begin a debt free journey.
Anonymous
Clark Howard is another good resource, and there are no religious views involved with his advice. Dave Ramsey sometimes mixes some religion in with his advice, which may not be for everyone.
Lauren
I teach Economics and this is a topic we cover extensively. Some debt is good (mortgage, education) but a lot of debt can be very bad (high interest credit card debt for those shoes you HAD to have). It creates interesting discussion, especially since I live on the border of one of the most affluent zip codes in my state, but also next to a city plagued with crime and a mass exodus of human capital.
Our family tries very hard to live within our limits. We don’t buy more than we need, although i do keep a stock of non-perishable food items in case of power outages (happens a lot).
Ellie
I always love hearing from educators who are teaching their students sound principles. Keep up the good work! What age are your students?
Ellie
Anonymous
Lauren – I keep the pantry very stocked with non-perishables too. I took advantages of coupons, sales, and BOGO offers to slowly build up “inventory.” I now have 2-4-6-8 (depending on how fast we use it) of everything in the pantry, all labeled with date of purchase and expiration date so I can rotate the stock. It’s relatively inexpensive insurance. I also keep bottled water, batteries, and all sorts of other emergency supplies on hand. There’s always some sort of storm brewing somewhere, and our house must have a target painted on the roof.
Karen
I love the new picture on your web site heading!!!
Ellie
Thank you very much, Karen!
Ellie
S. Trstenjak
Me, too!
Michelle
My husband and I have been married 27 1/2 years and have seen our share of struggles. He was raised “if you can get it, buy it” and it didn’t matter if you could afford it. About 10 years ago we found ourselves struggling so bad I was drowning trying to pay and unable to pay it all. We had to give up a vehicle, sell another plus sell anything we could until we could get back on our feet. I made up my mind then (and husband agreed) we would NEVER be in that situation again. Our goal is to be debt free. I follow the Dave Ramsey 7 baby steps and do not buy if I can’t afford it. Paying for part of my oldest son’s college and he is paying the rest. Paid cash for youngest son to go. It’s hard to begin now at my age but it can be done. I do not wish to be slave to the lender. I say “I” because I pay the bills. My husband just wants me to keep him informed. And he is good to not buy that pontoon boat he wants (haha).
Ellie
Thank you for sharing your story, Michelle. My husband wants a boat too, LOL, but he’s also good with not getting one (or waiting until we can afford it years down the road).
Ellie
Anonymous
Remember, you don’t just buy a boat…..you get the cost of the boat, the cost of upkeep, the cost of storage (if any), the cost of a trailer, the cost of fuel, and the cost of insurance. Plus the price of any guilt because you’re not out using this toy as often as you’d like, lol.
Ellie
Haha, that’s very true. We’ll see if it ever happens for us–definitely will be a long time, if ever. 🙂
Anonymous
Renting something like that first to see how you like it instead of running out and buying it is a wise thing.
Eileen
I agree. Houses and education are sensible debts. Lovely blog header photo of your family Ellie. Really nice. Eileen
Ellie
Thank you, Eileen! 🙂
anonymous
I’ve been occupied since June selling all the articles of a home, from a downsizing elderly person. Eventually ALL people downsize, either into a box or a jar. All their stuff gets left behind. That stuff becomes a burden to redistribute and liquidate $$$. Thriftstores, consignment, auctions, yard or garage sales, etc. People should realize that everyday all day, their are people completely occupied creating this stuff, to sell. Then it is transported and distributed around the world. Then how long it lasts depends on how well we take care of it. It is made and then it is ALL just out there in the world and people desperately want other people to buy, buy, buy it over and over. There is really just So MUCH STUFF !!! According to the Bible, there is an internal, battle for our soul, between stuff and Godliness. The Bible says to seek first Gods Kingdom and His righteousness and all this will be added to you.
anonymous
Its all about being desperate or not.
anonymous
The not desperate need to help the desperate. In the next life we will need mercy, even if we think we don’t need it now.
L
Single mom here…36.Paid off house last week and it’s a great feeling. It took me 5.5 years to pay it off, has almost doubled in value since I bought it.
Ellie
Congratulations! What an exciting accomplishment! Definitely calls for a celebration.
Ellie
Leina
I’m not american, so things are a bit different here (in northern Europe). My parents generations was very frugal and would rarely use credit cards, but nowadays it’s not uncommon to finance holidays, trips etc with credit cards or with credit loans. My hubby and I are not doing that. However we did buy a fairly large home, we had previusly owned a small appartement in bigger city in a highly sought after area. We lived in the appartement for 3,5 years and the value got up 10 000 euros. However we moved to a small town after that, after research we discovered that real estate market was very slow, older houses were moving very slowly. So we did’t want buy the next step on the property ladder, because we didn’t want to get stuck with a property too small for a family in case we’d get stuck there and when we bought the house I was a stay-at-home mum so we couldn’t get a very big mortage. We bought a big fixer upper and 8 years later we have paid half of the house and cost of renovations.
It has turned out great, we haven’t had the hassle of moving/changing schools/trying to sell the house etc. and house is big enough to be “a forever home” for our family. I know couple of families who got stuck to their old home’s because they would not sell, so they had to sell property with a very low price. One family was stuck in a one-bedroom appartement for years until they finally reduced price very low. We also bought the house from a good area. So sometimes it’s wiser to get a bigger house than you need at that particular moment.