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Thursday, September 28, 2006

Budgeting, Credit, and Debt

In light of the past and present discussions going on around the j-blogsphere, I thought I would finally kick off a series of posts about budgeting and debt. Quite honestly, it is difficult to know where to start because there are so many angles and factors to examine. So, I will put a few random thoughts below, take comments, and see where they lead me.

Chime in with any thoughts of your own, because finding a starting point for this subject is a challenge.

-->A rule of thumb: just because you qualify for credit, does not mean that you are capable of paying off the bill. Today there is a huge proliferation of available credit, and the marketing is strong and pervasive. On top of that, the "pushers" seem to loose no sleep over providing what can only be considered bad advice.

And, speaking of "pushing," just like the cigarette industry would prefer to get a person hooked young, so does the credit industry. College campuses, on any given day, are swarming with "pushers" who try to hook you in with a candy bar, t-shirt, or other gimmick. While having access to credit can be very positive (cashless transactions, rewards programs for certain cards, ability to rent a car or hotel room), many people are clueless about how to use credit and find themselves spiraling into debt. I am trying to locate some solid stats, but it seems that the average college student is graduating today with credit card debt. Add this to student loan debt, and the picture is grim.

Take, for example, our most recent trip to a mortgage broker. He pre-qualified us for a mortgage (30-year fixed) up to an insane amount. Should we loose our heads and buy a house with a mortgage of that amount, the monthly payment + escrow payment (an amount bound to increase when the taxpayers go to the polls), would nearly equal, if not exceed, our household's monthly income. Obviously, this would be toxic.

--> And, speaking of marketing, a rule of thumb: buyer beware. There is plenty of bad information out there being provided by your friendly credit card company, bank, or mortgage company. Take for example a recent promotional piece of mail, complete with checks to be drawn on my account (which will be shredded when this post is complete). The company encouraged me to use my "credit card access checks" for a "trip to [my] local home improvement center." This is stupid advice!!! Yes, stupid advice. Let's say I spend $100 on paint at my local home improvement center and I pay with my credit card. I will have approximately 3 weeks from the date of closing of the credit card statement to pay the balance without penalty. So long as I pay my credit card balance, I only owe $100. And, even if I can't pay off the credit card, it takes at least three weeks from the date of purchase for the interest to start building on that purchase. But, if I buy that same paint with a "credit card access check" the interest kicks in immediately. So, I will be paying interest for at least the time it takes to make a payment to the credit card company.

Another product that is being pushed is a credit card that gives you access to your home equity line of credit (HELOC). Just like above, interest kicks in immediately, and worse yet (!) if you can't pay off the HELOC, your home serves as the collateral, which could lead to foreclosure.

-->Rule of thumb: Budgeting should be done in the present. Too many people end up experiencing budget and debt problems when they budget their spending according to what they assume they will receive. Sadly enough, not every bonus that is indicated materializes, not every employer is honest, and plenty of clients do not pay their bills or pay on time. (See past post: Getting Paid on Time).

And, to tie budgeting a debt together, let's talk about student loans. There are those who would like to believe that graduating from XYZ grad school will mean walking down easystreet. So, they take out the loans with the presumption that they will be working for this firm that pays this amount, only to discover that there are low paying [law] jobs out there too. So, when budgeting for "good debt" or "neutral debt" or "bad debt," once again, realistic budgeting is key.

--> Rule of thumb: Do your research. If you are buying a car (new or used), you should be getting an insurance quote from your insurance company. If you are buying a home, you should be inquiring about the history of the utility bills. If you are renting an apartment, you need to find out what the current rental rates are, not assuming that you will be renting at the same rate your friend is. When you are taking out a health insurance plan through your employer, you need to find out how much they cover and what will be coming out of your paycheck. And, speaking of what comes out of your paycheck, you need to budget properly for taxes or you could find yourself with an unexpected bill come April 15.

And, speaking of research: parents who are supporting their married children should do their research too. Just recently someone mentioned that a family agreed to pay rent for their recently married children. They assumed rent was around $X, only to find out that they would be paying something like $600 more a month. Clearly their information on rental rates was years out of date. But, in the world of shidduchim, an agreement is an agreement. So, I wish them luck, because, from what I hear of the chatan's educational plans, they will be in for the long haul.

6 comments:

Ariella said...

Excellent points and post! Too easy credit can make it too easy to fall into a debt that is very hard to climb out of.
Even some very high paid lawyer sometimes have to take years to pay off their student loans.

Insurance alone is a very complicated issue, and each type needs to be reviewed and compared. If you look at premiums alone, you may be missing other important points, such as limitations of coverage.

an indebted college kid said...

Sephardilady,

Great post! I'm glad that you added the part about college kids and credit card/student loan debt. It's a hard decision to make.

Last year, as it came time for tuition to be due, I got very nervous because when I checked my student account online, my loans that were supposed to be there were not. I called my dad in a panic, and he told me that he and my mom had decided to pay off the student loan debt that I had incurred thus far with money my loving grandparents had given them for my tuition, among other things. While I am eternally grateful to my grandparents and parents for making my life (once I graduate) much easier with a large chunk of debt eliminated, I ran into a tough decision in the short-term. Unbeknownst to my dear parents, paying off my loans made the Federal government assume that my parents (or actually, myself) had somehow come into lots of money (yeah, right!) and therefore would not need the loans.

So, no major life crisis at this point. My beloved dad has a separate savings account specifically for emergencies, so he was able to give me the money to cover the tuition expenses. Problem solved, right? I wish. While tuition was covered, I still had the issue of living expenses to take care of. This is where the credit card comes in. Hindsight is 20/20, and I realize know that I should have just gone to my parents about this and explained the situation, but I didn't. I felt badly enough about needing the tuition money and didn't want to burden them further. Since I didn't have much money saved up myself, I had the *brilliant* idea to get a credit card.

Bad idea. Bad. But I have to give myself credit that I did it with the best of intentions. I thought I could use my credit card for necessary expenses and just pay it back bit by bit. WRONG! Almost $2000 dollars of debt later, I was in big trouble. I had to take the next semester off of school and move back home and take a job working heavy machinery in a factory to pay off my debt. And now, 7 months later, I have finally paid it off.

I give thanks to Hashem that I was able to pay off my debt so that I will not have a bad credit score when I finally start my own household and have someone else's finances to take into consideration along with my own. My heart goes out to all of the parents out there struggling to provide all they can for their children, and to all of the college kids like me trying to make it with student loans and credit cards. May we all be written in the book of life for the new year!

SephardiLady said...

College Student-What a story. But, good for you for realizing quickly that you are in a bind and getting out of it. Congradulations. I think you are leading me into my next rule of thumb. So, thank you.

I was part of the honor society at my high school. Around spring break, the honor society hosts a meeting with the previous year's seniors (current 1st year college students) where they each dispense advice. The best advice I remember was from a bright friend who had got into trouble with credit cards. She took out 4 of them (!), maxed them all, and ended up working 4 jobs during her 1st year in college to save herself once she realized she was in a bind (which she fortunately realized quickly).

Ariella-Good point on insurance. Insurance is very complicated. For those taking on minimal coverage, it is easy to compare "apples to apples." For those who have to take more extensive coverage (higher level of assets, additional insurance policies that require better coverage, etc), it is difficult to compare apples to apples, since each company offers different things.

We drive two older cars. One is nearing 20 years, one 10. Our insurance is low: under $1000 a year for two drivers. A new car with one driver can easily cost more than this. So, we will be sticking to older cars, so long as they are safe and run well.

Jak Black said...

Great post - waiting to hear the rest of your advice.

Living in Israel has a great advantage - the "credit" cards here are for the most part in fact debit cards. Although one can break up payment, there is no "minimum payment" as in the States. Because of this, I don't have a cent of debt...well, except the mortgage :)

Speaking of the mortgage, I agree that a person should not max out. We bought a new place a couple of years back, and had to make a serious decision about how much to borrow. I am proud to report that although we could have bought a bigger place - with payments within our budget - we chose to purchase a smaller place that would leave us with more leeway in terms of repayment. I know countless people who made the wrong choice, only to find themselves in hot water after a change in work, finances, etc.

jewchick said...

Wow, thanks so much for this post, and the ones that I know are to come... I was just planning an email to you about how to prevent this terrible problem people are having with tuition.

Thanks!

SephardiLady said...

Jewchick-Please email me. I'd love to hear your ideas. Gmar tov.