Saturday, September 02, 2006

Repeat After Me: No Debt is Good Debt

Here in Canada, there's this show called "'Til Debt Do Us Part". It's a show about young couples who want it all and want it now, and have absolutely no clue how much money they make or how much they spend.

On one hand, I can't believe there are that many people in the world like this. But then I think, our generation has been raised to keep up with the Joneses, so I think that many people just believe it's normal to have huge credit card debts and prohibitive mortgage payments.

People: get a grip. Lines of credit, credit cards, home equity, these are not INCOME. You are spending money you haven't yet earned. That means that the money you earn pays for things you already possess, not things you want. When interest rates rise again, that's going to be a lot of interest on old things that need to be replaced, but you don't have any money to replace them because they're still being paid for.

Over the next few years, there will be an unbelievable North American recession. It will start in the States (specifically, on the coasts), then spread through the mainland, and up to Canada. Then it will impact the world. Who will be blamed? The Fed? Probably. The banks and lenders? Most likely. The consumers who spent and spent with no clue as to how they would actually AFFORD what they were buying? Of course not. You see, they were just the innocent pawns of the banks and big business. That's the story that will be told, and it will be complete bullshit. Had more people managed their money wisely, we would have a steadily climbing economy and probably have started paving the way to prolonged prosperity. Instead, the economy boomed, and now we're all suffocating under our own debt.

So, what should everyone do?

1) For God's sake, pay off your credit cards. This should be a no-brainer. Then, don't put anything on them you can't pay off within a month. If you're unable to do this, cut 'em in half. If you NEED to put things on your credit card in order to get by, you're in deep shit. But, you can at least see if you can get a line of credit at a lower interest rate and use that instead.

2) Lock in your mortgages as soon as possible. Don't wait. Yes, the payment will be higher. But you'll actually be paying off principal, which will hopefully build faster than your home loses value, and you won't have any nasty rate jump surprises. Can't afford to do this? Have some relatives move in and charge rent. Liquidate some investments if you have any. Americans can use their tax returns from mortgage interest to drop on the principal.

3) Re-assess all big ticket items. Do you own your SUV and your plasma tv, or are you paying a ton of interest every month? Do you lease a car? Ask yourself, do I really need all this stuff? That second car? The jacuzzi? The VISA-financed trips to Europe? If the answer is no, start liquidating. Trade in your car for a slightly older model, or a same-year model that consumes less gas. Sell the crap you don't need and can't afford. I've never owned a car that was less than 5 years old, and I've never had any major problems with them, only regular maintenance and a few repairs. Sure, they're not the nicest cars in the neighbourhood, but why do they need to be?

4) Learn how to cook. Going out and ordering take-out is a huge guilty pleasure for most (me included). But it's expensive. You can cook the food yourself for a fraction of the price. Most cooking isn't rocket science, it just takes practice. Buy a good, solid cookbook and pick out 3-5 things that look interesting, then try them out. There are good recipe sites all over the Internet. Kitchens these days are becoming the nicest room in the home, spend some time there. Use those stainless steel appliances. When you do go out (hey, you have to treat yourself sometime), limit yourself to one drink, or better yet, just have water.

5) Adopt a cash only policy. Charging things on a visa or using a debit card does not make you aware of the money you are spending. Take out a chunk of cash to last you a few weeks, and use that. If you're not comfortable carrying a semi-large amount of cash on you, hide some in your home and only take what you need for a given day. When you start dropping a wad of bills instead of plastic on a shopping spree, you quickly realize just how much dough you're going through.

It's not too late. Rates are still low compared to historical standards and the economy's momentum is still pushing it forward. Get yourself into the best position you can.


At September 28, 2006, Blogger Normalcy Overrated said...

Item #1 on your list is my big "goal" for now. It is very hard when you live paycheck to paycheck. I just keep plugging along....


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