Probably like many of you, we struggled when we were first married and trying to raise three kids. None the less, we always lived within (actually under) our means which at that time was one income - mine. We "never" believed in credit card debt and still don't (pay off the balance every month). In my position at that time I saw what happened to people who lived for the moment . . . it's pretty funny but sad when you know someone driving a fancy new car, fancy house, etc. is having their utilities disconnected for non payment. Anyways, our approach served us well over the years. Today we are debt free and could pay off the balance in a blink. It's a real nice feeling. And, there enough left over to keep me wondering where the market is going. But, even there I am so "balanced" I don't fret about it.

 

I too pay off my CC debts every month *EXCEPT* in one circumstance where it actually worked to my advantage to carry a CC debt...

Visa offered me a limited time 2.9% APR rate for 6 months and raised my credit limit. Since my S2000 (bought new in summer '03) has a 4.29% APR, it made more sense to allow my CC debt to increase while I paid down as much as I could of my auto loan. It took a bit of planning ahead of time to make sure that I was able to get back to a zero balance on my CC when it's interest rate ballooned back to it's high rate, but I was able to get about 1 year ahead on my car payments... Of course I still make monthly payments on it and am trying to pay it down as quickly as possible. The interest on those payments is about 30% less now however, and since I'm a year ahead on the payments, if I ever run into a financial thin patch, I can skip some payments and not worry about it (yes, I confirmed this wth the auto loan company... and my statement says, "next payment due _____ 2005")

 

I think we may be confusing two issues here, debt and living beyond one's means.

Debt in and of itself is not a bad thing. For example, the mortgage on your home enabled you to purchase a home which you otherwise would not have been able to afford. Your home is (hopefully) an appreciating asset, and your mortgage (hopefully) was based on your ability to repay over a long period of time. This debt is not a bad thing.

Nor is the borrowed money that a professional or business uses to invest in assets for that business. Those assets are purchased with the intention of establishing or expanding the business and the income and cash flow generated by those assets are (hopefully) enough to meet the debt obligations. In this case, debt allows the business to increase its assets thereby increase the business now, with the obligations to repay spread over time. Without debt this would not be possible.

College loans make a college education possible for many who could not otherwise afford it. The increased income expected as a result of the college educations justifies the debt assumed. Many believe we all benefit from an educated society and that is why government has participated and helped to make low interest loans available for this.

The young couple, just married and setting up a household that borrows money to furnish is another example. The expectation is that the income of this household will increase overtime and the debt will be relatively easy to repay overtime. There is nothing wrong with this.

All of the above are examples where debt can be used to an advantage. Of course, these examples are based a proper and valid evaluation of the ability to repay the debt. And they are based on the assumption that the debt will actually be used for the intended purposes.

Living beyond one's means is an entirely different story. For example, the young just married couple that borrows money to furnish is not the problem. The problem begins when they owe the money and then go out and borrow more to buy the BMW that they want to drive. When their debt exceeds their ability to repay, it becomes a problem.

The business that borrows money to add to its assets and increase its cash flow is not the problem. When the increased cash flow then goes towards higher executive salaries, perks and other wasteful spending instead of retiring the debt it becomes a problem. Again, if the business, or for that matter the individual, cannot control its spending, debt becomes a problem because there is never the funds available to repay. In this case, the business has to more and more rely on borrowed money to pay its obligations, and generally, the interest expense becomes overwhelming. Worse still is when the creditors stop the credit and the cash stops flowing.

My point is that debt in and of itself is not a bad thing, and like everything else, is a tool to be used. When used properly, is works fine. When abused, it can cause problems and lead to trouble.

By the way, bankrupcy was intended as a way to allow businesses the ability to take risk. Sometimes risk does not work out and debts cannot be repaid. The concept of bankrupcy was created to give relief in these cases. The theory being that innovation and growth require a certain amount of risk, and without the ability to get relief when risk goes the wrong way, nobody and no business would be willing to take risk. Bankrupcy was not intended to serve as a relief for frivilous and irresponsible spending. Unfortunately, it evolved that way.

 

Hi Rob,

I think that one of the problems is that many people don't know when to stop and end up 'living beyond their means'. It is too easy today to get caught up in the credit trap.

And it isn't limited to credit cards, but also things like furniture and automobiles. I have seen alot of furniture adds where they say no payments for 12 months or something similar. This is like giving liquor to a drunk.

But yes, I do agree with your statement. The problem is knowing where the line is.

 

Rob, you will like this story. My son bought a house 1-1/2 years ago and remodeled it. Then he sold it to his best friend at very nice profit. His buddy really couldn't afford it but did so anyways. Since it was near a lake, within 2 weeks of moving in he charged a $14k party barge! I told my son he could have bought a used one for $2k. He said his friend knew that but just had to have the new one. Just like the new truck he has to pull it. I expect he will be filing within the year. Only in America.

 

Dave- I thought you were going to say that your son bought the house back after 6 months.....at 1/2 price It could still happen....

 

I guess my rule of thumb is that debt is ok if it's for something that will still have value to me after it's paid off. Obviously, a restaurant meal is forgotten before the credit card bill even arrives; I consider it foolish to be in debt for such things. I financed an Integra in '94. It was paid for in '97; I'm still driving it to work every day in '04. I have to say that debt was good debt. A college education should have value for decades after the bill is finally paid; the value from a vacation trip may only last a few months, so I'd never go into long-term debt for a vacation. Even if it never appreciated one cent in value, when my house is paid off I'll have a relatively inexpensive place to live; my mortgage debt passes my test.

Rob makes a good point about living beyond your means. Someone on the radio once explained that "keeping up with the Joneses" used to mean trying to live like the wealthiest family on your particular street. And they probably weren't all that much better off than you or they'd live somewhere else. With the advent of television, the idea became living like the rock star you saw on "Cribs" or the family on "Dynasty", etc. The TV convinces us we deserve things, that they're our birthright, and so we end up with something like 50% of American households having zero net worth.

Reflect on that: something like 1/2 of American households owe more than the value of all of their assets. I remember when financial advice columns always flat out stated that you should have 6 months take home pay in the bank to cover a rainy day, no "if's...", "and's..." or "but's...". Then it became 3-6 months pay. Now, some of them even talk about a paid-up credit card as a way to cover a financial rough spot...

 

Rob,
I did post a link to the article which started me thinking. The point to the article is that debt AND living beyond one's means has in fact become synonymous.
The article went on to explain that this issue started with the boomers and has escallated to a point that is out of hand and led me to this topic. I understand the points that you have made, but the reality of the world today, at least according to the CSM is that living above one's means is in fact the norm, ergo we wind up with the issue of debt, not being one of mortgages or business cash-flow, but a new mindset for having what you want with little regard for the implications.
I guess my post was more of a question of the morality of living beyond one's means as a way of life....
After reading the responses, I wonder if I should ask if it's okay for the government to live beyond its means.

 

Ken

That is exactly the point that I was trying to make. The issue isn't debt at all, it is living beyond one's means. I'm not sure that it is a moral issue, or just an issue of fiscal irresponsibility. Either way, that is the point.

Debt is an important tool, fiscal irresponsibility is deadly. The problem is always that the two are confused.

To further confuse the issue, allow me to mention the "contridiction of thrift". If one person saves, it is very good for that one person, but if everyone saves it is very bad for the economy. Think about this for a moment. Consider the fact that the Japanese government is trying everything possible to get the population to be less thrifty and to save less and spend more in order to stimulate the economy.

Perhaps all of this irresponsible spending and the debt that follows is really very good for the economy in general. Perhaps we all benefit from all of this debt.

 

exactly... this concerns me though b/c it will not last forever, anyone remember the last time the housing market crashed........ millions walking away from mortgages, empty store fronts, vacant strip malls... I fear with the rising interest rates these days will be here again. All b/c of the lure of cheap money, instant gratification, and flat out greed..... soon cash will be king once again.