Monday, September 22, 2008

10 Signs You Have Got Too Much Personal Debt
(In no particular order)

In honor of the OU's workshop today in just a short to hours, I have compiled by own list titled 10 Signs You have Too Much Debt. You can take it very seriously or slightly tongue-in-cheek, but please don't take offense.

1. You bought and financed your home thinking things will get easier. After all, salaries always go up, right?

2. Two salaries are needed to pay the mortgage alone.

3. Unless pigs start flying, there is no way, no how your home could ever be paid off before you reach retirement age.

4. You have confused your home with a bank and/or ATM. Worse yet, you think your home is an asset or an investment vehicle. (And you watch home values in your neighborhood the way you might watch a stock you are researching).

5. You think carrying a mortgage makes financial sense because you will save money on taxes. (You also think leasing a vehicle makes financial sense because it leaves you with so much extra to invest--a theory I was introduced to by a date long ago).

6. You don't know how much debt you have.

7. You've got multiple sources of growing debt from mortgage(s) to student loan(s) to credit cards, to car payment(s), to 401(k) loans, to an account at the local kosher butcher. And, that's right, you also owe a few friends some money. It is getting really hard to keep track.

8. You've mastered the art of juggling (and I don't mean bean bags, scarfs, or clubs). Juggling Funds that is.

9. You have no savings and/or are depleting your saving. In other words, the writing is on the wall.

10. You think you can buy your way out of debt with different debt.

Bonus: You think you can "make it" because when you look around everyone seems to be "making it" so why can't you?

(Updated) 5 More Warning Signs:
Self-employment taxes, what are those?
You think you can afford a certain mortgage amount because you qualified for that amount.
You are dependent on outside sources to float you. (Worse, you are dependent on outside sources that are outside of the country).
You think every expense in your budget is necessary.
Budget, what's that?


Ezzie said...

Good list. To be picky, the vehicle example can be true - leasing at a low percentage while paying off higher debt, for example, or in general weighing a reasonable lease against ownership because of costs, etc.

rosie said...

What if one of the signs of debt is that you are so used to paying for everything with credit cards that you haven't handled cash in ages. The gas stations in our area now have 2 prices; cash and credit. Paying for gas with cash is considerably cheaper. Of course, that means no flyer miles or cash back rewards but also means no debt. I wonder what percentage of Americans have credit card debt when they die. Sometimes the sale of their estate covers it but sometimes there is no estate and then the credit card companies just eat the debt. Just like Jews should repent the day before they die, they should also pay their bills that way too. Maybe one of the ways to avoid credit card debt is not to sign onto a card with another family member. In case of a divorce, the primary cardholder may end up paying for purchases made by an overspending spouse. Children who need credit cards to buy emergency purchases when away at yeshiva should have the lowest limit cards available.

Orthonomics said...

Ezzie-I knew some finance or accounting major was going to come along and crunch some numbers. . . .not that there is anything wrong with that lol. :) :)

When you learn to compare costs in school, you look at a small time period, say 5 years. Fortunately in real life, cars last longer than the time you depreciate them, so you woud have to compare the lease period with a period of time double the size (sometimes triple the size) for ownership.

Here is a real life example:
*Car 1 purchased lighly used in 1994 for $14K cash. Minimal maintenance costs from 1994-2008. Still has 3-5 years of life left.
*Car 2 purchased in 1995 for $10K. Minimal maintenance costs from 1995-2008.

There is no way a lease could beat this, even if the cars were financed and quickly paid off.

That said. . . I love people who lease cars. You make ownership so affordable for the used car buyers among us.

Anonymous said...

I don't agree with #3. What if I have a low mortgage rate (<5%) plus am in a high tax bracket. Should I pay that one off vs. investing the money which in the long term should get me over 5%?

Orthonomics said...

Anonymous-A rule of thumb should be that you fully fund retirement funds and other tax deferred investment vehicles before paying off a mortgage early.

The point being made is about TAX. People spend a lot of time trying to pay less tax. But as one of my profs used to say the big picture is not all about lowering taxes. Same here.

(Sorry about deleted and putting back up comments. I'm not hitting all the right buttons).

Anonymous said...

1) Most young people do that; it usually works out well. Since we bought our house we have added a PhD, several promotions each and, even in real terms, our income has more than tripled. The mortgage has gone from a major stretch to a small fraction of our monthly budget. It is less than a quarter of what we pay in tuition for 4 kids. If you are stretching for a house in a more stable portion of your career, that may be more of a problem.

3 & 5) Whether carry a mortgage is advantageous depends on the choices. For example, forgoing an employer match on a 401K to pay off a mortgage faster is almost sure to be a loser. Yes, carrying a mortgage you don't need just to lower taxes is silly. The goal is to maximize your net; not give money to banks rather than the IRS.

9) depends what you are depleting them for. I am depleting savings for a couple years while I have 3 in college. That's what we saved it for.

Orthonomics said...

Mike S-
1. I am not completely against stretching for a first mortgage. But salary increases do slow and demands of family grow. Always best to base a budget on ther here and now and "find" money rather than assuming things will loosen up.

3/5. I was only commenting on the idea of continuously keeping a mortgage for tax purposes. One should max out retirement and establish a good size emergency fund before agressively paying off a mortgage. But you don't base financial decisions on saving tax.

9. Agreed, but those savings were designated to be depleted. Consider this a warning to the 20 and 30 something couples. Savings should be increasing or at least holding steady(although investments may be down). If one finds they are continuously borrowing money via savings or debt to fund current expenses, this is a sign of impending trouble.

Anonymous said...

Thanks for this. I really, really appreciate this blog. I wish there was a way that young couples could learn about it.

Leah Goodman said...

You've made a horrible mistake here. Those things you juggle are not bowling pins.
They're clubs.
(btw, juggling them is actually helpful for getting out of debt - my husband and I took some friends out to Jerusalem, and my husband performed for everyone. After the cost of sandwiches (sliced turkey, bread, mustard), drinks (we brought our own big bottles and cups, and candy (gotta have candy), we went home with about $30 more than we left with.
not bad for an evening out with 5 adults and 8 kids.

Orthonomics said...

trlcat-I was totally drawing a blank on clubs. Thanks! Cool your husband juggles.

Anon Mom-Thanks. Just let young people know there are resources out there (including this one) that they should take some looking at before and after they marry. I have other book reviews coming up too.

Anonymous said...

You don't base decisions on saving tax. True enough, although that doesn't mean that taxes shouldn't enter into your decisions. It is just that the goal should be to maximize your net, not minimize your tax. Paying money you don't need to in order to deduct it is silly. But if you are comparing paying off a mortgage to some other investment, you would do well to pay attention to the tax implications. Even without the match, you may well be better off saving in a tax shelterd account (e.g. 401K) than paying down the mortgage.

As far as stretching for a mortgage, it depends very much on where you are in life. If you are just starting out, it makes sense to stretch, and I am glad we did. but I had been working for a few years, and my wife had taken a leave of absense from grad school while our oldest children were little. We expected to need room for a growing family and could be pretty confident of increasing income. If I were forced to move and buy a house now, approaching the empty nest phase, I'd probably buy something I could pay cash for.

Orthonomics said...

Mike S-Numerous young people have been convinced (by whom, I'm not sure) that it is good for them to borrow against their home to invest (hopefully not spend, but we know that happens more often than not), thereby maintaining a mortgage ALWAYS because it is tax advantaged. In fact, a friend of mine was just telling me (when I mentioned I'd like to be mortgage free in another 15 years) that she and her husband were told they should always have a mortgage because it is good tax wise. I'm sure they missed a lot between point A and B but nonetheless they have been given bad advice.

I believe it was MIT that did a study comparing the option of investing in a 401k vs. paying down a mortgage and the result was clear-invest in your 401(k) and/or ROTH IRA and I believe that you could easily extend the example to a 529 College Savings Plan or Coverdell provided this tax defered investment had a good amount of time to sit and grow, time being the real key as markets go up and down in the short term.

Orthonomics said...

BTW-I can't reinforce your point enough. . . do NOT pass up company match. I've seen studies that only 1/3 of employees take advantage of match. Find a way to live without that percent of salary because the match is what really moves a retirement fund forward in a big way.

Zach Kessin said...

My big savings of late was that I got rid of my car, that was chewing up a huge amount of cash, we moved to an appartment from which I can take the bus to work. Even with the more expensive rent we still are saving a good bit. I would love to cut another 1500NIS out of our monthly budget but I'm just not sure where it can come from. Our two biggest line items are food and rent.

Anonymous said...

A good way to wind up in debt is to think you're smarter than everyone else. Nowhere is this more true than people who look at interest rates versus investment rates and are convinced they can outsmart everyone and make a killing. 9 times out of 10 they're misapplying financial principles. And even if they're not, do you really want to take such a risk? Is it really worth it to eke out a few percentage points at the risk of losing significant money? The market doesn't always pay out 8%-9% annually, house prices don't always go up, etc.

Another point:
By the time most people start reading financial books, blogs, etc it's already too late. They're already in debt. Or they're about to be in serious trouble. This is especially true in the frum communities where people marry very young often without finishing a degree and having zero income. They then have a child soon after. They now have next to no ability to ever save money and will most likely start building up credit card debt and cannot get by without parental support. I see it all around me with the young couples. No one gives people good advice and any advice is pushed aside in the name of frumkeit - frum people get married early, frum people have children early. In fact, many people get terrible advice on financial issues (a little credit card debt is fine, everyone has it, you NEED to buy a new outfit for yom tov, etc). This is all compounded by the fact that many couples don't push themselves to get the education and careers necessary to make anywhere near the amount of money they will need to support this lifestyle. By the time they start feeling the pinch, it's already too late.

Ariella's blog said...

Good list. One of the key points the author of Rich Dad, Poor Dad also emphasizes is that people confuse their homes with assets. However, an asset should generate income, and houses often drain income. Even if they do go up in value, they are not brining in money the way stocks bring in dividends or bonds interest.

Ariella's blog said...

I also want to say that js makes an excellent point. I was at a school event last night where one woman was congratulated on her 18 year-old daughter's engagement. She just finished seminary, so she may be turning 19 in a few months but could still be marrying at 18. Mothers of boys approaching that age say that they have a bit more time. I have already told my young daughters that I would not allow them to marry that young. Marriage is, of course, a great thing, but it would be much easier to get through college without having to set up a whole new household and then have to care for a baby, too.

Anonymous said...

I think it is very important to learn how to think about money, and compare options in a quantitative way, and to teach your kids this skill. Rules of thumb and advice from good books is a reasonable starting point, but there is no substitute for being able to analyze your exact situation. Anyone who mastered middl school math should be able to do this if they learn to thnk clearly about money.

Rebecca said...
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