I read a story on CNNmoney today about being Grown-up about Debt. This article focuses on people that seem to spend compulsively on non-essentials using their credit cards. To be honest, that has never been my problem. I tend to invest compulsively in education, businesses, and kids.
Here's a list of things I don't pay for with credit:
- dining out
- Christmas gifts
But I do use credit extensively. Here's what I have borrowed for:
- purchasing property (well over $1,500,000 so far)
- education (college, business seminars, real estate courses - about $30k)
- legal fees (a $30K divorce bill)
- adoptions (close to $100k)
- property improvements (not day to day repairs - just major upgrades)
- Business start ups (over $50k)
So do I use credit stupidly? Or is the use of any type of debt a bad decision? (My wife thinks it may be.) My first inclination is to defend my debt as "good debt", but I want to step back and really think about this first.
Consider my wife's lifestyle in China. She had her own home completely paid for, she saved up enough cash to even purchase a home for her parents with no mortgage. She always had cash reserves of 6 years of a typical Chinese citizen's income. She did this working as an accountant and living well below her means for 20 years after college and she did it primarily without the resources of a spouse. Her life was completely stress-free from a financial standpoint. At the time I met her, she had a pretty nice lifestyle - eating out whenever she desired, buying whatever cloths she wanted, travelling to nice vacation destinations - a very upper middle class lifestyle.
My life, on the other hand, has always been filled with financial stress. Making sure the dozens of bills I have get paid every month, managing unexpected financial needs, moving money around to get a better interest rate or refinancing when a balloon payment is due. I need to look at my on-line checking nearly every day to manage all my accounts. I rarely dine out and take but one vacation a year. Yet my income is supposedly great (over $100k per year). Comparing the two lifestyles, my wife's wins hands down.
Most of us have been led to believe that we need to spend what ever it takes to get a good college education. Now, I probably got my money's worth from my Engineering degrees. But with the cost of a college education escalating so rapidly, I think that for a lot of people it is a poor investment. The WSJ had a good article today on this.
Now, I think education is indispensable. But some things that are not taught at school affect your finances much more than what is taught. For example, a course on choosing a mate and how to develop a lasting relationship would have been a big help to me! Education with an emphasis on savings, not using credit for luxury or non-essentials, investing, and money management would all be higher priority than English literature. But more importantly, getting an education from someone who has succeeded in the field you have chosen is a lot more important than getting an education from someone with just a degree.
Now I think that some debt can be very good. As I wrote previously, using leverage to purchase real estate can turn your small amount of money into large amounts. However, even for real estate this may be a bad decision if you purchase your property at market value in an area that is not growing well. I think that if you treat your real estate purchase first as an investment, not as a cocoon, then it's a good use of debt.
Debt to buy a business can also be good. I've watched two of my brothers buy accounting practices and turn them into very profitable companies. My sister-in-law has also used debt financing to turn her business idea into a multi-million dollar enterprise.
So today my list of what to use debt for is very small:
- education - but only for those fields where there is a good payback. Getting a degree for the sake of a degree is probably not worth it. Get a more specific education in a field where you can start a business.
- real estate - again only when you buy with the intent of making a profit. Buying a house you can barely afford to make your spouse comfortable doesn't fit my model
- business - with the caveat that you have a well developed business plan and are committed to making it work what ever it takes.
Today most people expect that they should live a good lifestyle what ever their financial situation. They want to live in a home nicer than their parents and drive the latest model cars and take expensive vacations. They want to have the reward before they have paid the price of success. So we use debt and pay the consequences all of our life. This is exactly backwards from what really successful people do. Pay the price first.
The Bible teaches this from Proverbs 24:27
27 Finish your outdoor work and get your fields ready; after that,
build your house.