Got Orthonomics in your Email Box?

Monday, March 02, 2009

Dear Orthonomics: What do you think?
What About your readers?

Dear Orthonomics,
Can you please advise? I have found an incredible deal on a quasi-essential big ticket item that would really help improve quality of life in our home. I’m thrilled to find this item, which I predicted would cost over $1000 for only $600. However, I do not have the cash to buy this item and will need to put it on a high interest rate credit card. I will be able to chip away at the debt each month and believe I will pay off the entire purchase in just over one year, incurring around $100 in additional cost. I’ve calculated the price after interest and it still is a deeply discounted. What do you think?
Sincerely,
A reader

Dear Reader,
My answer won’t surprise you! Don’t do it! Personal finance is more about behavior than numbers. While the numbers work out favorably, you have to keep in mind that another great deal will come along. Between now and then, you can save up the cash for the purpose. As you state, the item is quasi-essential, not essential. Refraining from the purchase will not prevent you from working or receiving necessary and expensive medical care, it will simply make your life more convenient.

We have a saying in this house, “debt begets debt.” If you do not have the cash to make a relatively small purchase, and this is a relatively small purchase, you are certain to find yourself in a bind as unexpected purchases accrue. And life has its way of throwing the unexpected, from increased prices for essentials like rent, utilities, food, or gas, to some thug sticking nails into your car tire twice during the same week or busting your windshield (yes, both of these things happened to us!), to the shower doors and bedroom door lock malfunctioning and leaving you nearly trapped inside (yes, both of these have also happened to us!).

If you really believe that you can chip away at this debt over the course of a year, you can also SAVE up the cash over the same year. I recommend going into serious saving mode through all means possible. Look for a little bit of extra work here and there. Before long, you will have the cash and another deal will come along.

Sincerely,
Orthonomics

86 comments:

Tamiri said...

If it's for a washing machine or fridge, I would say do it. If it's for a dishwasher I would say save. I don't know what quasi-essential means to you, but if you have an essential item such as a fridge which you are sure will break and cost you hundreds to repair as opposed to just buying new now then I think it's time to buy. If it's a new bed, then that is something to save for.
For anything less than ESSENTIAL, first you save and then you buy.

Lior said...

I guess it really depends on what it is, but if there is a chance that you will be able to make more money based on the time savings of this item, then I would have purchased it.

SephardiLady said...

It isn't a washing machine or a fridge. In the case of a washing machine, going to the laundry mat can easily cost an inexpensive machine over the course of 6 months to a year.

A good thing to remember is that quality appliances can be bought through families remodeling and places like Sears always have returns that are discounted. That is how I got one of our appliances.

If the questioner wants to reveal the item, that person is welcome to do so.

I left the item out so that the question remains more open ended and less focused on specifics of the item.

SephardiLady said...

P.S. The questioner asked me via email if the answer would be any different if they are already very aware of their budget and are already in savings mode.

My answer: no! If the family is already in savings mode, it shouldn't be long that the cash is available. In the meantime, stuff happens. Just today I lost a paying job because of snow. And just last week another job got held off for a month because of red tape.

With a few exceptions, I believe in cash.

tdr said...

I agree a hundred times over w/you SL. (no surprise there :-))

Personal finance is more about behavior than numbers.

How very very true!

I have seen all kinds of appliances being given away on craigslist and luach. Get a free one and then another free one and then another free on if you absolutely have to while you save to buy a decent one.

Get a crummy free one and deal with it until you have the money

Tamiri said...

When something like a washing machine goes and you have a family (not in a apt. building where everyone has one in the basement), you have to get a new one no matter what. Even if it means borrowing from a gemach fund, which we did once.

tdr said...

I meant to leave off that last line of the previous comment.

One final comment: don't do it even if you have a low-interest credit card.

tdr said...

I have seen washing machines on craig's list, too. You can use a laundromat until you get one. Highly inconvenient, I know! But doable.

Ezzie said...

I'm the original questioner, and I don't mind revealing the item: It's a computer.

I could hear both sides of the argument, hence why I threw it over to SL and her readership.

Does the fact that it's a computer change anyone's mind?

Ezzie said...

If the family is already in savings mode, it shouldn't be long that the cash is available.

Just to play devil's advocate on this one, I'm not sure that's true. Savings to many means paying down debt hard and fast, but it will still take a while.

JS said...

The fact that it's a computer makes me MORE likely to think you should wait.

Computer deals don't go away, they just get recycled. Besides, the longer you wait before purchase, the better the machine as the technology constantly improves.

Not sure what kind of computer you want, but there are great computers out there for much less than $700 if you already have a screen (or are willing to buy one separately - I got a 19" widescreen LCD monitor for about $150).

Dave said...

Change my mind? No.

Reinforce it? Yes.

Computers always get cheaper. You will always get more machine for less money over time.

You are better off saving the money and getting the machine when you have cash in hand, if at all possible.

Ariella said...

Sephardi Lady is right that we could get bogged down on the particulars of the item. For example, someone posted a laptop for sale for $500 on the local shul list today. If the computer is needed for work, then it is not quasi-essential but just plain essential. I actually draw income from my computer (no so much for Kallah Magazine) by scoring SAT essays for Pearson. So even if I would have to shell out $1000 on a credit card, it would be worth it for the net gain of $10,000 that could be earned in one year (and the computer should last several years). But the "quasi" makes it sound like something nice to have -- more features and capability than the computer already in one's possession. I'm still working on the same desktop I acquired already used some 5 or more years ago. But I do know people who just buy new computers every 3 years or so even though they do not even derive income directly from computer use.

Ahuva said...

The economy is awful and is not showing any times of getting better anytime soon. That means that there are going to be lots of incredible bargains out there.

I would definitely save up for it because odds are very good that what you want (particularly if it's a computer) will still be there (with a deal that's just as good if not better) after you've saved up the cash.

tesyaa said...

Last summer we considered installing a new boiler to replace our very inefficient, but still in good working order, old model. We were told we could expect to use 25% less heating oil -- a big difference when oil is $4/gallon. We decided not to do it because we didn't have the excess cash in hand. Almost right away, oil prices dropped, so we may be saving 25% over last year both because of the lower price and our attempt to lower our thermostats. Over time, it would probably be a saving to upgrade, but given the amount of uncertaintly involved, I'd only make the change if money were not an object or it became truly necessary.

SephardiLady said...

Ezzie-Savings and credit card use gets really confusing when there is already debt.

I highly recommend Dave Ramsey's book Total Money Makeover. I have some minor differences with Dave Ramsey, but one area I think his advice is spot on is that a person needs to gather a "baby emergency fund" of $1000 to prove to themselves that it IS possible to gather cash. He recommends doing such through whatever means are necessary (a second job, selling stuff, cutting back through minimal eating, etc).

I really like the concept of taking control over one's finances and think the mini cash $1000 emergency fund makes some good sense.

Tamiri said...

"The economy is awful and is not showing any times of getting better anytime soon. That means that there are going to be lots of incredible bargains out there." Actually this means hang on to every cent you can because you may not have a job next time you go into the office.

Now is the time to spend less and less and then spend even less. Pocket the change for a rainy day.

Dave said...

Now is the time to spend less and less and then spend even less. Pocket the change for a rainy day.

And thus we get the Paradox of Virtue.

You are absolutely right; in uncertain times, building reserves is exactly the right thing for every individual and family to be doing.

However, when everyone does this, the economy spirals down.

That is in fact, the real economic theory behind a governmental direct spending stimulus. When it is in everyone's personal best interest to save money, someone has to unstick the economy, and Keynesian economics has the government playing that role in economic distress.(*)


(*) Yes, not all economists agree on this. But this is the basis for those who do think that a direct spending stimulus is necessary.

Tamiri said...

Smart people will pocket the money. Spending on another computer or jeans or shoes is not what will save the economy. It didn't save the economy last year, did it? Creating manufacturing jobs and exporting goods... now, there's a thought!

Avi said...

Hmmm. A quasi-essential PC. If it was absolutely essential, you'd buy it now. (PCs definitely can be essential for some people). If it was just a "nice to have," you'd wait. So I say split the difference - wait six months and pay mostly with cash. The deal will still be there - PC prices come down steadily over time.

The only exception is Apple's stuff, though even they will be lowering prices somewhat due to the economy. Apple tends to keep price points steady and increase power/features at that price. So if you're set on an Apple and the deal is gone in six months, you may have to get a lightly used model or refurb. But you'll get the same power per dollar as you'd get today, guaranteed.

Dave said...

Creating manufacturing jobs and exporting goods... now, there's a thought!

And who is going to buy these goods?

rosie said...

My 28yr old washing machine died today. I must log off and go to sears and see what I can get that saves energy.

Dave said...

Paul Krugman has an excellent article on savings and how we got where we are in the New York Times today.

http://www.nytimes.com/2009/03/02/opinion/02krugman.html

Ahuva said...

There has to be a balance. We got ourselves into this mess by freely spending easy credit and using our homes as piggy banks. The solution isn't to refuse to spend any money ever again-- the solution is to go back spending patterns that make sense (save up for what you want rather than buying on credit) and making sure that you have a real emergency fund. I know far too many people who use credit cards as their "emergency fund."

People should still buy things, but within reason.

I also agree with Ezzie about the definition of "savings mode" -- savings mode may not mean that you're actually accumulating money in the bank if you have a lot of debt to pay off.

Ezzie said...

On the flip side of what a lot of people are saying is inflation, especially hyper-inflation. The first is a near guarantee over the upcoming years and the latter all too real of a possibility.

I understand why SL didn't want to include the item in specific, because we're talking about concepts here. To most of the points against so far I could easily disagree.

As relevant to concepts, however, I'll try to stick to ideas...

The deal here is one that is not likely to be even close to replicated in the future. Yes, functional computers are out there for this price on deals once in a while, but we're talking about a computer that would likely be in good condition for 4 or more years, saving money in the long run in addition to now.

Think of it in terms of a washer/dryer. If your washer/dryer is still functional but on its last legs, and you know that at some point in the near future you will need to buy one; then you see a really top-scale washer/dryer at a price that simply will not be seen again for a while, would you buy it now? It will make you more efficient in the short run, allow you to allay another concern, be prepared for the future, and save you a nice chunk of change. On the flip side, it means a bit more debt.

[Note: I'm just trying to play devil's advocate on both sides here; I can see arguments for each side. I'm curious as to others' reasoning/feelings on the subject. Thanks!]

Dave said...

On the flip side of what a lot of people are saying is inflation, especially hyper-inflation. The first is a near guarantee over the upcoming years and the latter all too real of a possibility

Our chances of inflation right now are extraordinarily low. The real threat right now is deflation. I wouldn't expect to see significant inflation anytime in the forseeable future.

Ezzie said...

SL - While I think emergency funds are extremely important for anyone, at the same time, a person who has debt would have to weigh that $1,000 in funds against paying down debt.

Particularly for those who have control over their finances, it often makes more sense to use almost all cash to pay down debt while keeping in the back of your mind that should an emergency arise, you may have to give back some of that debt. It's the old argument about whether the numbers or the mentality matter most; for most people, it's probably the mentality, while for those who have the proper mentality, it's actually the numbers. You might/probably would argue that a person should keep aside the money to avoid the idea of "I'll just add debt if an emergency arises", while the person who understands that this is truly for emergencies or specific, worthwhile uses only might feel that to pay down debt and save that interest accrual will net them much more in the long run and is far too important.

Ezzie said...

Dave - Gotta respectfully disagree. With the amount of money being pumped into the economy from our own government, without having the current wherewithal to cover, we should see some pretty high inflation. Just looking at the historical data suggests that the tiny drop in core CPI at the end of last year is more consistent with every year - December always shows a drop in core CPI. Inflation in Jan was .3% (pretty standard), but the test will be the next few months. I'm guessing we're going to see a large rise.

Dave said...

Ezzie:

Interest rates are effectively at 0% from the government, the economy is contracting sharply, production is down, sales are down, jobs are down, many companies are freezing or reducing salaries. Oh, and the credit markets are still fairly frozen.

You don't get inflation when that happens. The money that would cause inflation is either in hiding (savings) or vanished in the falling housing and equity markets.

Esther said...

One of the areas my family has had to work on over time is the definition of what is quasi-essential, and being honest about what level of quality is really needed when buying an item. It's great to say "It's better to buy new because it will last longer." I was raised that way, by parents who didn't have expensive tastes and were able to afford to pay cash for appliances, etc. But that is not the reality for many of us.

If I don't have the money, why does it really have to be new? Why does it have to be a better brand? Why can't I get something from freecycle and if it breaks get another one? Or used from Craigslist, or any other alternatives to spending the money that I don't have on hand.

Using the computer example - my son needed a computer this year to play his Hebrew CD-ROMs that they give for homework. Yes it would be "nice" to have a second computer at home so that my husband and I could use it at the same time, or that the kids can start getting more time to use it. I could even call it quasi-essential since my husband works from home and it would allow me to do work at home sometimes. BUT - since that doesn't meet the reality of our financial status (i.e., in massive debt and low income), we had to be honest about what was actually NEEDED. We found a very old computer for $30 that has no software or internet, and is only used for my son's homework.

(But a few years ago, we would have talked ourselves into all the reasons why it was "better" to get a more expensive item. Thanks to SL for her part in changing our perspective.)

rosie said...

Went to sears appliance outlet. The stuff has scratches, dents, and scuff marks but does wash clothes so at least I got a deal.

nuqotw said...

Just my 2 cents: a deal is only a deal if you (1) already had the money and (2) you would have bought it anyway for the full price. That way you really did save the money, rather than being in less debt.

SephardiLady said...

Ezzie,
We had this discussion before. But on a different point, "taking back" debt might not be so easy anymore. Credit limits are being slashed. What happens when there is no more credit to live on?

The idea of the $1000 baby emergency fund is to help the individual understand that they can have cash on hand.

I do highly recommend Dave Ramsey's book. Good chizuk, even if I would debt snowball in a more mathematically sound way.

SephardiLady said...

nuqotw-Great advice. When I used to point out sales where we could 'save money' my father would counter that actually I would spend money.

Esther-My heart is always warmed knowing this blog is changing mindsets.

Shoshana said...

Just a thought...

My husband really needed a laptop in order to work on his private counseling and and parenting practice. We spent a few days thinking of friends, family and community members who might have an "extra" computer they would part with. The first person we decided to ask said, "Actually, I do have a good laptop that is basically gathering dust." He had his IT guy clean the hard-drive and it was ready for us a week later. So maybe start asking around in the event that something completely free could come your way. It worked for us! :)

Anonymous said...

It's scary to read about people taking on credit card debt even before tuition strikes. I'd highly counsel against that.

rosie said...

We still have my great-grandmother's "vash breitel" (wash board). I guess that is an alternative to a new washing machine but my husband wanted a new machine.
One of my married kids does not have a dryer. The stuff all goes outside. The sun heats his hot water tank. He lives in a gated community for only $450 a month rent on a nice house. The gated community is between Ramallah and Nablus and the gate is watched by the IDF. At least he saves money!

SephardiLady said...

It's scary to read about people taking on credit card debt even before tuition strikes. I'd highly counsel against that.

Could not agree more with anonymous!

Troubled And Frum said...

Thanks for the great advice SephardiLady. I agree with your post 100%. However, I think you have to make a distinction for something that generates money - a professional writer who needs a computer to write on maybe should go into debt in order to be able to generate a future income.

Avi said...

Ezzie,

You wrote: The deal here is one that is not likely to be even close to replicated in the future. Yes, functional computers are out there for this price on deals once in a while, but we're talking about a computer that would likely be in good condition for 4 or more years, saving money in the long run in addition to now.

No, we're talking about PCs here. Computers and most consumer electronics are subject to Moore's Law: over time, power and features go up, while prices go down. If this was something where pricing is steady over time (a car, a washing machine, furniture), I might agree with you. But if we're talking PCs, cellphones, GPS navigation units, cameras, or televisions, today's "amazing deal" (even if it's legitimately amazing, like a Black Friday special you need to camp out all night for, or a friend in retail willing to sell it to you at his wholesale cost because you watched his cat) will be around in six months or a year simply due to falling prices. I'm an analyst in this field and make my living tracking prices. Deflation is part of the consumer electronics business model and has been since the early 1970's.

Ezzie said...

Dave - If everyone is holding money (as people here are doing) for the downturn, and the government is trying to stimulate things by flooding new money into the economy, there will be too many dollars in total floating, even if a lot is being held. First as a result of companies trying to retain profits, then again as people start to loosen up when the prices do fall, we'll have too large of an influx and inflation, IMHO. But I hear your points.

Nuqotw - Loved that comment, which is the main reason I wrote to SL about this post idea instead of buying.

SL - When I used to point out sales where we could 'save money' my father would counter that actually I would spend money.

LOL - I always tell people that. It's actually quite funny at Shabbos meals, when people will start talking about deals (really good ones) at places like Children's Place, etc. While some are obviously necessary (Serach bought both kids about all the clothes they'll need next year for about $75), at most of the rest myself and a few friends will make that same point. It's often men vs. women, but that's probably coincidence. :)

We had this discussion before.

Yeah. I think it's a Q of typical consumer vs. those are extremely on top of things. For the majority, I *do* think you are correct. I'm less sure about the rest. (Hence this post. :) )

As everyone keeps recommending Ramsey's book, I'll have to check it out.

Finally, as a last point, I think that in situations such as Ariella's and Shoshana's it's clear that the person should take on the debt if they cannot get a free computer elsewhere. It's a necessary investment that will clearly pay for itself. FWIW, as I told SL originally, we're using just such a borrowed computer, except we did think we'd return it soon at the time and it has now been 7+ months. Had we NOT had a computer, I would not have found or been able to do numerous things that ended up saving us or earning us hundreds if not a couple thousand dollars, in addition to reducing headache dramatically.

When I said quasi-essential, I meant in that it does help us do things we do need to do better. I manage all our money online, I keep up a blog (which does bring in at least some ad revenue), and we manage Serach's small side businesses online in addition to other projects I've started such as the survey (though the last is not intended to nor does it make any money, it's still important). Now, is increased efficiency worth actual dollars at this point? I'm honestly not sure. I suspect it could be, but it's not like those examples.

Ezzie said...

Avi - Computers and most consumer electronics are subject to Moore's Law: over time, power and features go up, while prices go down.

Agreed. Hence part of the dilemma. On the other hand, I'm guessing the equivalent of what I'm seeing will still be more or at best close to similar to the price it's at now even in one year. Perhaps more importantly, there's a limit to how long we can go without a computer of our own; should this rigged borrowed computer not be able to hack it in 3 months, we'd be stuck and have to spend more. (Which is like the washer example I gave above.)

If you're interested, I can send you the specs I was looking at. :) (Buy.com ran out of them, so the deal has ended.)

Dave said...

If everyone is holding money (as people here are doing) for the downturn, and the government is trying to stimulate things by flooding new money into the economy, there will be too many dollars in total floating, even if a lot is being held.

None of the government programs (here or abroad) are providing enough money to flood the market.

The money that vanished from the economy in the collapse of the equities and real estate markets is in the trillions of dollars.

We won't be at risk of inflation until the labor markets tighten as we fully come out of this depression. And given that I expect the GDP to drop by more than 10% from peak, that is the appropriate term.

I wouldn't worry about inflation as a risk until 2011-2012 -- if we're lucky.

Deflation, on the other hand, would sink us. Or sink us deeper.

Tamiri said...

Dave said...
Creating manufacturing jobs and exporting goods... now, there's a thought!

And who is going to buy these goods?

March 02, 2009 12:46 PM
Usually, when you export, other countries buy your good. Manufacturing can be food, clothing, paper goods... anything people need to use. Big ticket items, rather than being imported, should be produced locally. But honestly... whatever. I live in Israel. We have our own problems.

Anonymous said...

Ezzie - The deal here is one that is not likely to be even close to replicated in the future.

There is no way this is true. Not from buy.com and not from anyone else. Computers always go down in price or up in function.

I've also been looking for a computer and have been watching mostly Dell and HP, and every time they have what I think is the greatest deal ever, a few weeks later there is an even better deal. Oh, and I've been looking for about 2 years so far.

Also, think hard, very hard, about how you will use the computer. If you will mostly be using the internet via a browser, you can get a weak one and it will work mostly fine. If you will also be doing pictures and music, or documents and editing, then you need a little bit more power. And, finally, if you are going to do video editing or something like that, you need the most power. Don't buy a computer with more power than you need.

Finally, Dell has some very good deals and sometimes you can even buy a Dell coupon on eBay that makes it an even better deal. I've done that in the past when buying a digital camera (bought a $40 coupon for $10 or something like that, saving $30 net off the camera).

Mark

Lion of Zion said...

ESTHER:

"my son needed a computer this year to play his Hebrew CD-ROMs that they give for homework."

i know this is just an unrelated footnote on what this post is all about, but i have to ask how important this type of educational technology is. are the boys in esther's son's class any stronger in hebrew my friends and myself who did not have hebrew cd-roms for homework. (then again, it would have been irrelevant, as we never did homework.)

or in other words, do our schools have all this technology because there is a genuine pedagogical need for it or is just for the sake having cutting-edge technology?

Lion of Zion said...

SL:

i understand the concept that it should never be considered acceptable to go into debt. but clearly we do this for things like housing, educations, etc.

so where do you draw the line as to what is an acceptable cause for accumulating debt?

Dave said...

Usually, when you export, other countries buy your good. Manufacturing can be food, clothing, paper goods... anything people need to use.

Right. The entire world economy is in a steep decline. Worldwide purchasing is way down, worldwide imnports and exports, all way down.

Ezzie said...

Mark - Unfortunately, I've had far too many negative experiences with Dell in the past. Customer service *is* important; theirs is beyond horrid.

I have been keeping my eye out for HPs, Macs (which almost never show up at all in deals), and Sony VAIOs, just because I've heard good things from people.

I had at my last job and have now a borrowed IBM Thinkpad with a lot of processing power, but find that it's still not enough. I designed and ran extremely heavy Excel spreadsheets [2000 rows, 100 columns] utilizing vlookups and other extensive IF formulas, then topped them with numerous pivot tables. The processing power I need to do what I typically do is tremendous, and the memory I need is also very large. Anything smaller and the computers typically can't handle the formulas and pivots.

I also need a large screen (large spreadsheets are impossible to navigate and edit on smaller screens), portability, wireless capabilities, etc.

From what I've been looking at, there have been almost no deals that fully fit what I'd need and like for a really great price (let's call that <$600). The only one I'd seen prior to this that had all the specs I'd prefer was $900 about 4 months ago, and slightly better specs.

Lion of Zion said...

EZZIE:

my own computer is an HP. customer service is the worst.
i also have a dell laptop from work with gold support. it is great.

tdr said...

LOZ so where do you draw the line as to what is an acceptable cause for accumulating debt?

Dave Ramsey draws the line at the house. I know many people think you need loans for higher education. I'm not sure this is true. He frequently has brainstormed with young people on the verge of taking student loans on ways to get higher education without doing this. I think if one is creative and willing to make sacrifices it *might* be possible.

My point is I do think it's possible and desirable to draw the line at a certain point and say "I will borrow money to buy a house, but not for anything else."

ezzie: Unfortunately, I've had far too many negative experiences with Dell in the past.

I've actually heard that for some high-end models of Dell computers, one of the selling points is you are guaranteed an American-based tech support person! I think this is hilarious. You probably don't get that with a $600 computer!

SephardiLady said...

If the question was changed to purchasing a (now) essential item for business, my answer would be slightly different:

Starting a business requires equipment and/or cash. The equipment, as well as the interest on the equipment, is deductible against business income, which makes it more palitable.

Before getting started, I would want to be reasonably sure that I was going to actually be making money and that the purchase would pay off. Every business is different, but for accounting, book keeping, or consulting, finding the first account before making an additional purchase that adds to pre-existing debt isn't a bad idea at all.

For a business requiring more up front capital, I'd get my feet wet in the business and make sure I like it before heading out solo. If you want to own a franchise or a retail store, work in someone else's first.

If you are planning to go into business fulltime, having a cushion is going to be important. If you are married, a spouse's income might help as a cushion. Other ways to cushion yourself would be to work at your other job part time while building up your own business. For someone without these cushions, cash is the word.

LOZ-A reasonable mortgage is the only form of debt that doesn't make my stomach turn.

Some student debt can be manageable. What I see from others is beyond reason.

I hate consumer debt (but you knew that).

Student debt should be the subject of a future post because I have some insights some won't care to hear.

Esther said...

Lion of Zion - I definiltey agree with your point about the technology, and what actually happened is an Orthonomics situation. The school Hebrew curriculum includes this CD-ROM for home use, and therefore assumes that each child will have access to a computer. It happens to be that this is a reasonable assumption in our school, but turns out that the CD only ran on a PC and we have a Mac. So we were basically told that we needed to get a second computer. (The school knows our financial troubles and I'm not sure what they actually would have done next if we had simply not been able to do so or had refused. I think they would have found someone who had an extra computer they could lend or willing to give away.)

SL - I would love to see more information on Orthonomics about how to go about starting your own business or franchising in a financially responsible way (and how to decide if an "opportunity" is real or not.) I think a lot of people will be looking into this because of the job situation.

Thinking said...

SL-

I would love to hear your thoughts on student debt. I live in a community made up of many professionals who have significant student debt, but many of whom are fortunately still employed even in this economy. I have also been running workshops lately for individuals who are currently out of work and, I hate to say this, are frightfully undereducated.

I would also like to point out the difference between short term and long term debt. If you don't have control of your finances, both are bad. If you do, they can both be extremely useful.

Personal Debt Examples:
-Treadmill (want not need, st debt) - Sears offered no interest for 18 months. We paid it off in 12 (cancelled the cc) and have had it for 5+ years.
-Mortgage (need, lt debt) - 30 years. Still paying. Low Interest Rate.
-Family Loan for down payment (need, st debt) - started to pay it off immediately post closing. No Interest.
-Student Loans (need, lt debt) - started paying post graduation. Low Interest Rate.

If you can afford the debt and have a good understanding of what you can afford, then it does not have to be the uptmost necessity in order to use debt to buy it. Know what you can afford, understand the timelines and act responsibly.

All this assumes that you have no other outstanding bad debt, such as credit card etc.

tdr said...

If you can afford the debt and have a good understanding of what you can afford, then it does not have to be the uptmost necessity in order to use debt to buy it. Know what you can afford, understand the timelines and act responsibly.

Unforeseen circumstances can sink the most well-intentioned debt and can cost you big time and for years and years to come. That is why keeping debt to the minimum (0) is of utmost importance no matter how good your current circumstances, no matter how good your future prospects, no matter how responsible you are.

People's decision making is dumbed-down by having credit available. They prefer to borrow money rather than 1) make hard choices, 2) think creatively and 3) make sacrifices in order not to.

Ezzie said...

People's decision making is dumbed-down by having credit available. They prefer to borrow money rather than 1) make hard choices, 2) think creatively and 3) make sacrifices in order not to.

While true, those who are already doing all three of those steps should still be open to the idea of using debt responsibly when needed. I'm not sure why people differentiate between investing in a business and investing in one's own life. If the investment is worthwhile, you should consider doing it in your personal life much as you would in business (though of course there are heavier factors in life). If the investment is not, you shouldn't be financing it even if it IS for a business.

Ezzie said...

LOZ - That's the first negative I've heard about HP's customer service; more importantly, I rarely hear of people with HPs running into problems.

Dells I've found have problems too often and customer service outside of the US is atrocious. It's sad that a company has a "higher" level of customer service if you pay more - a friend uses that and rarely has as many issues as we did, but I don't think that's worth it.

Thinking said...

tdr-

I agree with Ezzie on this one. Only if you assume that everyone reading this blog has debt issues can you make a blanket statement like that. If you have sufficient funds for emergencies, then debt of 0 is not necessarily the best response.

There are great ways of using debt to invest in yourself and your family if you are in control of your finances.

Example: If you have excellent credit and control of your finances, financing a new car vs purchasing a used car is a great idea. You can get low or 0% financing on cars that are being sold at extremely low prices and get a tremendous return. You receive a warranty and a higher likelihood that the car will last longer in return for a very small premium if you act responsibly.
It would be hard to argue that a used car is better then a new one. If you can finance it without raising the cost of the car, which is possible these days, then why shouldn't you do it?

Financing was created for responsible individuals. It is only in the past 10-15 years that this became everybody.

Ahuva said...

Ezzie,

The problem is that "investing in one's own life" starts one down a very slippery slope. For example, I financed the new windows on my townhouse. In some ways, that made a lot of sense-- my heating bill was lowered drastically because I no longer had to put in extra space heaters for warmth and I was emotionally happier because I didn't have to deal with all those awful drafts. In other ways it might not have been so smart. I spent a lot of money on interest. But it also opened up the door to other things that I "needed" to finance-- a new heat pump, a new washer and dryer, a new hot water heater, a new roof... the list is all but endless.

I could argue that I was investing in the quality of my life when I took out my car loan. (My car accident left me with a terror of driving a used vehicle that didn't have the latest and greatest in safety technology.) But was the "investment" really worth the thousands of dollars I'm paying in interest on that loan? I'm not so sure anymore...

Tamiri said...

"Financing was created for responsible individuals. It is only in the past 10-15 years that this became everybody." I wanted to write this but you beat me to it. It's more than 10-15 years, it's been around for a LONG time, known as layaway in the olden days and financing (read: taking a loan at a high interest rate) in more modern times.
Once upon a time, people saved and then bought. Then the banks/credit cards/loan sharks/financing companies took a ride on the "give it to me NOW" school of thought, and created the myth that everyone can/should have debt because they deserve what debt buys.
Big, big BIG mistake.

Dave said...

You receive a warranty and a higher likelihood that the car will last longer in return for a very small premium if you act responsibly.

We may have a different definition of "small premium". You can get a late model, low mileage car, which still is under the Manufacturer's warranty, for between 1/3 and 1/2 less than the same car new.

tdr said...

I just love this blog.

Lay-away is the same as "saving and then buying" imo.

There are great ways of using debt to invest in yourself and your family if you are in control of your finances.

But this "control" does not exist with certainty. Circumstances outside of your control can up-end the best of plans no matter how responsible, etc you are. See one of the recent "Pretending it away" posts.

It would be hard to argue that a used car is better then a new one.

Not at all. Many personal finance "experts" argue all the time that a late-model used vehicle is a much better value than a new car.

As far as investing for business vs. investing in one's life. Well, I actually don't favor going into debt for business either. Yes, I am pretty hard-core!! You start small with available resources and slowly work your way up and up. At the very least, people should work hard to do it this way rather than take the "easy way out" and borrow borrow borrow.

Again it goes back to the mindset that becomes pervasive when credit is easily available.

I'm sure, SL, you can find your previous posting on this very subject much more easily than I can!

I personally think the personal growth that comes from NOT going into debt for life's "essentials" is a better investment than buying anything with money you don't have.

(any Calvin and Hobbes fans out there? this approach "builds character".)

SephardiLady said...

Living life without being burdened by debts IS also a wonderful investment in one's own life.

SephardiLady said...

http://orthonomics.blogspot.com/2008/12/using-credit-plays-games-with-your-mind.html

tdr-Thank you for reminding me of this post. (Also a conversation with Ezzie where I make the case that plenty of debtors view themselves as responsible).

Thinking said...

"It would be hard to argue that a used car is better then a new one.

Not at all. Many personal finance "experts" argue all the time that a late-model used vehicle is a much better value than a new car."

This argument is made when there is financing at a high rate of interest. Few people can afford a "late model, low mileage car" purchase outright if the purchase price is 1/3 the original price. They will need to finance it. Once you are looking at a car of less then half the original value, there is an inherent risk you are taking. It is a "used" car, no matter how they try to tell you it is just pre-owned.

Brand new $15K car at 0% financing for 48 months. If you can afford $250 a month you will have paid off the loan in 5 years and only paid interest on 1 year.
If you purchase the same car 3 years later for $10K you cannot get low financing on a used car so you are paying at least 7-8% for the lifetime of the loan.

The less you pay the higher the risk you are taking, that is a reality.

There absolutely is good debt, if you are debt averse then that is your own personal feeling.

Think of anyone you know that has built up a substational business, at some point they took on debt. No one in real estate bought their buildings with cash. They took out smart loans that they could afford. If you have a substantial employee base then you are using a line of credit to cover your payroll until your clients pay their bills.

Are there people who misuse or abuse their lines of credit? Sure. Are there those that made bad decisions when making real estate invetsments? Sure. That is not everyone though.

Dave said...

Price new: $15,000
Price used: 1 year old, 11,000 miles on it, $10,000 (including 6 year, 90,000 mile warranty) (*)

So, the cost for that "new car" was $5,000. Assuming 0% interest over 48 months, that's $312.50/month.

For the used car, assuming a 48 month loan at 7.5%, that's $241.79 a month, for a total cost of $11605.92.

Now, let's assume that we could afford the $312.50, and so we pay that much for the car anyway. In that case, we actually pay the car off a year early (three years instead of four), for a total cost of $11,250.

So, for the new car, we have an extra year of payments to make, and we pay $3,750 more total.

That 0% New Car wasn't a bargain.

(*) The actual case when I bought my last car in 2004.

Thinking said...

Dave-

I hear your point.

I'm glad you found a bargain, but your case is rare. Cars will typically lose 40% of there value over the 1st 3 years, it's rare to see 33% after just the first year.
If I found that deal I would take it to.

There are many other factors to take into account including:
-Are you comparing the first 5 years of ownership (used is better).
-Keeping it until the "wheels fall off" (often new will be better).
-Risk (there is less risk if you are the original owner).

My point is that if you buy a new car, are getting an interest free loan and you can afford the payments you are not necessarily making a bad debt decision.

I could live in a smaller home and be just fine. I can afford to own a home that is larger. Is that bad debt? (I pay all my bills, have no debt other then my mortgage and student loans and have 6 months worht of emergency funds).

Dave said...

I'm glad you found a bargain, but your case is rare. Cars will typically lose 40% of there value over the 1st 3 years, it's rare to see 33% after just the first year.
If I found that deal I would take it to.


It's not rare in my experience. I haven't purchased a new vehicle in almost 20 years. And cars lose a huge amount of value the moment they have a non-dealer owner.

If you have one near you, we had very good luck with CarMax.

There are many other factors to take into account including:
-Are you comparing the first 5 years of ownership (used is better).
-Keeping it until the "wheels fall off" (often new will be better).
-Risk (there is less risk if you are the original owner).


I drive them until they die.

The difference in risk and lifespan between a new car and a one year old low mileage car is negligible. You still have the original warranty, and usually have access to an extended warranty.

Assume the car will last for 120,000 miles. In our example above, and assuming roughly 12,000 miles per year, we have a 10 year life expectancy for the vehicle.

New purchaser: $15,000 for 120,000 miles and 10 years. Car cost per mile, $0.125. Car cost per year, $1500.

Used purchaser: $11,250 for 109,000 miles, and 9 years. Car cost per mile, $0.103. Car cost per year, $1250.

Dave said...

Oh, one caveat. If you are buying a new standard transmission vehicle, add the cost of a new clutch in, just to be safe. It's amazing what people can do to one.

Ezzie said...

SL, TDR - I'm with Thinking on this one.

Living life without being burdened by debts IS also a wonderful investment in one's own life.

While true, it can also be a handicap. People get caught up with the idea of not having debt to the point that they find themselves unwilling to invest money in items where appropriate, costing them more in the long run.

It's like going back to basic finance (or really, corporate finance). You have to weigh each prospect and calculate the likelihood of it being a net positive investment or not, and also factor in what other investment options you have.

Let's say you had $1,000 extra sitting around. You know you could make 25% on the money in a year if you would invest it, with the only caveat being that if you need the money at any point, you'll have to sell the investment and you'll no longer gain that 25%. Without any question, you'd invest the money, knowing that the worst you'll do is net out where you were and most likely you'll earn 25%.

It's why the emergency fund of $1,000 is wise in general but can seem silly when it's that vs. paying down debt. If a person has $1,000 of CC debt at 25%, and has an extra $1,000 sitting around, they can either hold the money for emergencies or pay down the debt. Paying down the debt seems to be the prudent choice, as a year later, you'll have saved yourself about $250 in interest payments.

Obviously, those are easier examples in terms of net gain vs. risk. A person must do a responsible and honest analysis of each situation to gauge. Some (such as the original one in the post) are too gray to know, but some are able to be analyzed responsibly and should be rather than assumed to be "bad".

Dave said...

One word of warning, if you plan on paying down your credit card and having it available as an emergency fund.

Banks are now "chasing the balance", and reducing credit limits sharply as balances are paid down, to limit their risk.

So, while you will pay down (or pay off) the credit card, you may not be able to use it as an emergency fund.

SephardiLady said...

Ezzie-What happens if the credit available is no longer available? $1000 in cash is a very small amount.

Al said...

Dave, I agree with your assessment generally... though when our cars finally fell apart, we bought a new one (good deals at the time, or seemed so until the bottom fell out of the market), and one late model used.

When considering the financing, it's not quite fair to put them both at 48 months... since the new car will be 4 years old, and a late model used car will be 5 or 6 years old at that point.

While "driving them into the ground" should take 10 years, it can certainly happen sooner... I'd give serious consideration to a shorter loan term for the used car to keep it far.

We financed the new car over 6 years, the used car over 5 years, so they'll both be paid off with hopefully 3-4 years of life left in them.

But, it's a little risky, IMO, to have a car loan on a car no longer under warranty (you can, of course, do an extended warranty) if you have the precarious finances of many of the people on the blog. If the car is paid off, and you suffer a major failure (engine, transmission, etc.) you can either pay for the repair or get a new car (it's now driven into the ground), if you still owe money on the car, it's a riskier situation... particularly since you are likely underwater on the car, so unless you have the cash to pay it off, you "roll it" into the next car, and that's where the outrageous financing costs get people.

I'd say a Powertrain warranty makes me comfortable, but without one and carrying the loan would put many people that aren't responsible into trouble.

I like Carmax as well, I figure you overpay by about 5%, but there is a real peace of mind with a business focused on selling used cars at a rich but fair price, instead of used car dealerships that are designed to overcharge and confuse people.

Dave said...

CarMax was lower than Kelly BlueBook, whenever we bought cars there.

One other thing. Assume you buy your late model used car, and finance it at 7.5%.

Once the car is paid off, keep putting that car payment in the bank.

Then, when the car eventually dies, you should hopefully be able to pay for the next used car with cash, and avoid the finance fee entirely.

Anonymous said...

For all those saying you can get a late model car still under warranty for 1/3 or 1/2 less than new, I've been looking for an accord or camry that meets that description for about a year and haven't found one. (My current car bought when it was one year old is 13 years old.) There might be lots of SUV's available, but I think people are holding onto their fuel efficient cars much longer. Any one have any suggestions? I got seriously burned with a used American car once and am gun shy now.

Lion of Zion said...

ANON:

i could have written your comment. i will never again buy an american car. (detroit deserves what has is happening to the auto industry and i oppose any bailout.) i've been looking for a while a gently used accord, but there are no bargains (although i'm speficially looking for a certified car)


EZZIE:

i don't know what to tell you. i had such bad (and only bad) experiences with HP support.

i'm sure the dell gold support is expensive, but it's worth (i don't pay for it). you have no idea how much of a pleasure it is to talk to an american who actually knows what they're talking about

Ezzie said...

SL - I've only once seen a CC slash available credit, and that's despite not such great credit. But of course, if you think there's a chance it won't be available, that's a different story.

For that reason and also because of how credit score is calculated I warn people against getting rid of cards even if they want to not have CCs.

LoZ - I do know, because after hours with Dell I'd insist on having them have one call me back. But thanks for the input on HP, always good to know.

Ahuva said...

Ezzie,

Credit card companies are doing all sorts of things we've never seen before, even to people with great credit. I haven't had a limit lowered, but I have had them close cards that I wasn't using and raise interest rates for no apparent reason. One of my cards even started charging a $10/month fee to encourage people who had large balances at a low interest rate (3.99%) to pay the debt down faster. Each time I called to complain, the reason given was that more and more people are defaulting on their cards, so they need to raise rates/fees and otherwise limit their risk.

I'm not sure that it's wise to have credit cards as your primary safety net these days.

Ezzie said...

I'm not sure that it's wise to have credit cards as your primary safety net these days.

It's never wise to. I'm talking more about having it as an extra backup, period.

Interesting, though.

SephardiLady said...

I took about a credit card a year or two ago because it offered a cash rebate in $50 increments that would go directly to pay off a Countrywide mortgage.

I only used it once when I couldn't get my credit card that puts my cash reward into a 529 College Savings Plan.

TWO WEEKS ago I was sent a notice that all Countrywide Credit Cards are being closed as of a certain date.

I have always paid off every credit card at the end of the month in full. We have excellent credit. We have a mortgage through the same bank, as well as a CD in an amount greater than the credit limit on the card. Yet the bank is closing EVERY SINGLE account.

I just read that AMEX is offering a large cash reward to certain card holders to pay off their balances. Many other companies have lowered balances for customers with great credit scores.

Times are changing and I'm afraid that anyone who thinks their credit card is an emergency fund and anyone who things they can continue to chase 0% introductory rates is going to be sorely mistaken, and possibly up a creek.

(And on that note, I'm afraid that major, across the board changes in credit cards that don't allow for "juggling" could tumble day schools---yes, there are people paying full tuition sticking every other bill on a credit card and then playing the transfering game).

Thinking said...

SL-

The Amex offer is ridiculous. They are offering $300 to account holders that pay off their accounts within a specific time frame and close their accounts. Who are they offering this to? High risk cardholders! What are the odds they can pay this off? Nil!
I didn't get the offer, is it because I rarely use my card and have no balance? I would be happy to close my amex account for $300.

Countrywide is in trouble, it is understandable that they would do this. I have Citi and Chase cards without balances and not received any notices yet about cutting my credit.

I have stopped receiving a lot of junk mail cc offers, which i guess is one upside.

Anonymous said...

Countrywide is in trouble, it is understandable that they would do this.

This is a heck of an understatement! CountryWide as a stand-alone entity doesn't exist anymore and has been taken over by Bank of America whose CEO, Ken Lewis, has been lambasted over his decision to take it over when he did.

But you can bet that the well performing accounts and cards will have been transferred to Bank of America before they close "all" the CountryWide accounts.

Mark

heatheramyprice said...

interesting discussion. my computer a friend gave me because my old one died, is working, but not well, and I could DEFINITELY use a newer/better/faster model. I'm still sucking the last bit of life out of this one.

Just got a tax refund. Could pay for new computer right now with cash. Can't decide whether or not to do it because we're wildly in debt and wouldn't the tax refund be better spent going towards the debt.... oy.

Lion of Zion said...

ANON:

"For all those saying you can get a late model car still under warranty for 1/3 or 1/2 less than new, I've been looking for an accord or camry that meets that description for about a year and haven't found one."

on the one hand, it may be harder to find those late model used cars. as new car sales plumet (honda down 38% and toyota 40%)
more people are competing for those quality used cars.
on the other hand, new cars are being so heavily discounted that in some cases there isn't much a of a difference between new and used:
http://finance.yahoo.com/family-home/article/106687/Decision-Time-New-vs-Used-Cars;_ylt=AkN5KECapBSwpv0iY1nlr1W7YWsA

are you in the NY area? i've found that with one possible exception, all the honda dealerships are scumbags (hillside in queens is the worst of them). you think that in these times they'd try to pull people in, not scare them away.

good luck.

Lion of Zion said...

ANON:

http://www.nytimes.com/2009/03/04/business/04auto.html?_r=1

Ezzie said...

Dave - I stand corrected, at least according to GS's Robert Savage today, who thinks the market is gearing for deflation over 2009.