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.