Where do you draw the line?

May 10, 2010 · 30 comments

Unless you are the dumbest person in the world, you probably have realized I’m not the biggest fan of debt. I think it’s pretty stupid. I don’t even believe in such a thing as “good debt.” Although I’m a pretty avid debt puncher, I do compromise on two issues…

Home

So I guess houses are kind of expensive. The median home price in my zip code is $708,000. Even if Girl Ninja and I were able to stock away a whopping $50,000/yr in savings (which we aren’t), it would take us over 14 years before we could buy a house with cash. And that’s assuming home prices don’t increase during those 14 years we save. While we do plan to have a sizable down payment saved before buying a home, we plan to take on a reasonable mortgage. Yeah, I know. I totally compromise my debt punching for a quality of life boost. To those of you that plan to pay cash for a house, I respect you greatly, but I simply don’t share your vision.

Medical

This one goes without saying, and I assume most of you would agree. If for some reason the crap hit the fan and I was faced with a decision between death or debt, I’m gonna take on some debt. That said, I am doing what I can to ensure I never have to be faced with that choice. I pay a pretty penny for health/dental/vision insurance each month, not to mention I have a decent chunk of change sitting in an emergency fund. My insurance and savings should prevent the need for medical loans, but on the rare chance I needed to buy a new kidney on Ebay, you better believe I’d do so. Side Note: How much you think a kidney goes for? $50K? $100K?

That’s it. Those are the only two areas of my life I foresee incurring debt. I realize my stance may be extreme for some, and for others it’s probably not strict enough. And this leads to today’s question….

Where do you draw the line?

What type of debt have you sworn off for good?

What type of debt are you comfortable with?

Do you think you’ll finance your next vehicle?

At what point does debt go from being logical to being ridiculous?

p.s. click the “dumbest person in the world” link in the first sentence for a special treat :)

1 StackingCash

1. Credit card debt never had it, hopefully never will. Will never do a 30 year home loan.
2. I think a 15 year home loan is a good debt, a 30 year is just way too much, just look at your last article :)
3. I don’t mind financing a car for the same reason you don’t mind financing a home, quality of life boost :)
4. I think the talking goat would be too expensive to finance. Also it would be expensive to care for.

2 Larry

Re your point #2: I refer you back to my first post of yesterday. When inflation is taken into account, the advantage of a 15-year loan is drastically reduced.

3 StackingCash

I prefer to own a home outright in 15 years than 30. I’m guessing you would rather gamble the difference in the stock market. I find it amusing how you use an “average” rate of return and cost of inflation numbers as a concrete example. Those numbers are highly variable depending on the circumstances. When it comes down to it, do what works best for you, as J.D. Roth says.

4 Larry

Of course inflation varies over the years. Right now we’re in a zero-inflation cycle, but that is likely to pick up over time. Nonetheless, inflation has historically averaged slightly over 3% for the 20th century. Do the math and you’ll see the 15-year loan is not as great a deal over the 30 as the nominal dollars would suggest.

And yes, I would prefer to *invest* the difference in a well-diversified, low-fee basket of index funds to earn the best rates of return while spreading out my risk.

5 StackingCash

Hey Larry, I want to apologize if I sound like such a snide and cynical punk. I can understand if you had great success in stocks and/or mutual funds. I didn’t, so ya I’m very bitter about it. However, being overly cautious has actually save me quite a bit of wealth. I avoided the housing boom and the last stock crash and I’m quite happy about it. When I watch CNBC and look at those in charge of such vast amounts of money like Goldman Sachs and Madoff, I’m again comforted that I was not involved with them either. Also I wonder if companies like Moody’s and Standard and Poor’s put their triple A stamp on worthless mortgage backed securities how much can you trust anything in this country. There is too much corruption for me to trust my money in that mess. As someone else told me, maybe I should invest in guns and bullets and a bomb shelter. Again the cynic arises. I apologize :)

6 Larry

Hey Stacking. You don’t have to apologize. I don’t claim “great success in stocks”; I believe from all I’ve studied that having a substantial percentage of my assets (not all) in stock funds is the best strategy over long buy-and-hold periods of 20 years or more. So while I lost ground in the last stock crash, I’ve made up a good deal of it in the long rally since. I stay with Vanguard and Fidelity index funds, and my modest co-op apartment was purchased for $87K, with a $35K down payment and $24K left on the loan after 20 years.

7 ashley

I never want to be in CC debt again. It’s been a long road paying them off but I’ll be free and clear next summer.

I have a 30 year mortgage and there was really no way around that.

I’ve always financed cars but I’m hoping that one day I won’t have to. I’ll have to finance my next car for sure. Having an efund is more important to me than paying cash for my next car.

8 Financial Samurai

I draw the line on all consumer debt that can’t be paid off monthly.

I LOVE mortgage debt, and sub 4% debt ie student debt thought. I can’t get enough! :)

Best, Sam

9 Kyle C.

Credit Card debt is probably the only one I am really averse to. I don’t mind my mortgage debt and I don’t have a big problem with financing a vehicle provided your purchase is reasonable and payments stay within your means. I just bought a car and financed it, GASP! My cash flow is more than sufficient to support the payments and didn’t go crazy with what I financed. We put down a healthy chunk of change after selling our old car and drawing from Savings.

10 Jeff @ sustainablelifeblog

to answer your questions:
1) I’ve sworn off credit card & auto loan debt (once I pay off what I have)
2) I’d be comfortable with debt on a home or place to live, but that’s about it
3) I dont think I’ll finance my next vehicle. I’ve financed this one, and while the payments havent been awful or anything, I’d just rather keep my money. I wasnt really in the position to pay for this one with cash, however, so it was either a hoopty or take out a loan, and I was looking for reliability
4) I dont know what stacking cash is talking about, i’d totally finance a talking goat. I think the type that can be most ridiculous is student loan debt. You dont really realize how much it is until you’ve got to pay it back, and by then it’s too late.

And to note a point about taking out a home loan: Thankfully, homes in my area arent that expensive. I could save your 50k for 3 years and buy an above average home where I live.

11 lifeasapurse

(1) I’ve sworn off credit card debt, as soon as I can get the $3,500 paid off that I have left.
(2) I’m comfortable with student loan debt, to a reasonable extent. I do not have undergraduate loans, and I am getting a good financial deal to go to graduate school, so if I have to take on a small amount of debt to be comfortable while I invest in myself (and my future earnings potential), I will do so.
(3) My next vehicle will probably be while I am in grad school, so I will likely finance it. I will try to save up a good down payment, however, at least $5,000.

12 tom

I’ve sworn off all debt above 5% interest.

Allow myself to explain, myself…

This automatically includes credit card debt, personal loans, some auto and home loans, and some student loans.

Think about it… why does everyone think mortgages and student loans are “good debt”? Most say this is good debt because you get a tax deduction. If your mortgage rate is 8%, and your tax rate is 25%, you are still paying roughly 6%. Federal graduate Plus loans have an interest rate of 8.5%. Tax deduction or not, if you pay high interest rates, you are getting screwed.

5% is my threshold, I can handle paying a 5% interest rate on a loan.

Unless I can save enough, I will finance my next car. I really don’t see the problem with it. If you cannot afford to pay cash, you’ve found the best price for a car you can afford, then taking out a loan is not a big deal, as long as it’s under 5%. You’ll want to pay it off as quickly as you can afford, but it shouldn’t be considered “bad debt”.

Bad debt should equal interest rates over 5%. Good debt is an oxymoron. No debt is good, but if it is under 5% interest, it’s neutral.

13 Young Mogul

I have sworn off CC debt and financing a car. I will pay cash for all Certified Pre-Owned cars from this day forward.

Also, I am employed in higher education and a lot of my colleagues are getting PHD’s at the cost of $40,000+. They rationalize that it’s good debt because it will increase their earning power; factor in undergrad and Master’s degree debt and they are looking at $65,000+ in student loan debt.

We are in the South, so a $50,000 salary can allow for a comfortable lifestyle. So, lets just say they are making $50,000 right now; with a PHD, they may increase to $75K entry level. But, my rationale is….if you earn $25K more with a PHD but all of the extra money goes to student loan debt, then your take home pay hasn’t increase…….then what is the point??!!

Most of my colleagues are in their mid 30s, so if they take 20/25years to pay off the debt, they will be at a stage where they should seriously take the new take home pay, now that student loans are paid off, and apply it to retirement funds. So, they have NEVER really realized the standard of living they hoped for by earning a PHD.

So, another debt that I would never take on is exurbatant(sp) student loan debt. It is soooo not worth it to me. Stay at home for free and go to a state school.

14 Larry

It’s all a matter of perspective. An elephant standing 10 feet away from you in the zoo looks much larger than the moon some 240,000 miles from the earth.

Everyone hates credit card debt, and on the whole I agree. I have a zero balance on my MasterCard and usually pay all charges on-line as soon as they’re incurred. But try this: a $1500 sofa is on sale at 20% off for $1200, but you don’t have the $1200. You can budget $600 a month, but if you wait you’ll lose the sale price. Or you can charge the $1200 on your 20% API Visa. Oh my god! Dave Ramsey will have a fit! 20%! 20%!! I can hear that raspy voice now, condemning me to hell for being such an unrepentant debt sinner. Actually that 20% API = $120, and if not paid off quickly will keep growing incrementally because interest will be computed on the interest. But it’s only $10 if you pay the $600 within a month. So if you pay the charge in two installments, your price for the sofa is $1210. Big deal.

As for other big-ticket items other than a home, it all depends on the size of the loan, the length, and the interest. I just bought a $24,000 car and paid about 1/3 in cash, with a $18,000 loan at 3%. I can pay it off any time and if I pay within 3 years, I pay $540 in interest. I took the longer 5-year term, which adds a maximum of about $600 more, or $10 more per payment. Again, big deal.

15 pebble

i currently have college loans and a car loan, and i am on the same pg that the only other type of debt i would be ok with taking on is for a house/medical reasons. even though i made it through school on pretty good financial packages, they weren’t completely full rides, and for various reasons, it was an experience i needed, so i don’t regret the loans. especially since it was only a little over 13k for a top school, 4k of which is at 0%, about 2k i paid off before interest even started accruing, and the rest i’m doing my best on.

my car loan was a result of my getting a better job and needing to travel out of the city, and a few months later, i was promoted and now have to drive long distances for work (with mileage reimbursed) so in hindsight, i’m glad i bought a relatively new car with low mileage, cuz i’m gonna drive it to its death on highway miles. i am hoping to pay this puppy down within a year or so (the loan was for 11.4k), so hopefully that makes the interest negligible.

next time around, i hope to be able to pay for a car in cash, have never owed anything on a credit card and never plan to (God forbid something terrible happens).

16 S.

Ninja, What about debt for your child(ren)’s college education? Would you consider co-signing a loan for them?

17 PunchDebt

I don’t think I would. Mainly because I plan to begin contributing to their college accounts as soon as they are born in an Educational Savings Account. If I do that, then they should be able to go to just about any school without taking out loans.

If I was unable to save for their college experience (due to extreme life issues) then I would force them to state school and should be able to help pay the majority, if not ALL of their tuition. However, if there was no way around student loans, they would have to be the ones to take them on. No cosigning for me. I could always help them make payments, but I will never be a cosigner for anything. Ever.

A child going to college should be anticipated and, I believe, saved for when they are little babies. That way it lightens the financial burden on everyone.

18 Budgeting in the Fun Stuff

1. I’ve never had high interest debt like credit cards…so I continue to swear that off.

2. I’m not comfortable with any debt, but we currently have a mortgage (5.375%) and one car loan (4.6%). The car loan should be paid off by the end of this year (bought in 2008) and the mortgage has about 7 years or less left (we bought our house in 2007 and will pay it off by 2017).

3. If my crappy car can make it another 18 months (it’s only 5 years old and has less than 42,000 miles, but it is already having problems), then we will never finance a car again. If it dies before then, we may have to finance half of my next vehicle and then be able to pay cash in the future.

4. I think that any debt with interest over 10% is ridiculous…that’s just too much cash to be shelling out for the benefit of borrowing money.

19 Shauna

I think I’ve sworn off all debt… I don’t even know if I even want another mortgage in the future. Home ownership is overrated.

I want my money to be mine, period.

20 Stephan

student and home debt are def worth it if you dont have the cash. I try to avoid cc debt as much as possible, and actually have never financed a car, save up and trade in and you can basically get a 10000$ car every few years.

Preferred Financial Services

21 JoeTaxpayer

Nice post. The house debt is okay when the house is priced so your cost to buy is lower than your cost to rent. Anything above that and you’re paying for more than a place to live.
I think the 15 vs 30 is a tough call. As I’ve mentioned around the web, we got the 30yr, and had a child two years into it. After 5 nanny-years, money freed up, and we are now in the last 7 years of a 15. Back then, I think I planned well. Nothing wrong with a bit of a tight budget knowing a huge expense will go away. All this time we’ve been saving well over 20% for retirement.

22 Rainy-Day Saver

Our mortgage is the same as if we were to rent a 2 BR apartment in this town, so that’s pretty good. It’s the property taxes that kill us in NJ.

We also got the 30-yr mortgage, which is the only debt we’ll willingly pay interest on (got a “great” 5% rate). We plan to have children, so we didn’t want a 15- or 20-year mortgage yet. We did have to finance a car, but that’s at 0% interest for five years, and we plan to get at least 10 years out of it. I wouldn’t be willing to finance a car loan in the future unless we again qualified for 0% interest — especially because a new vehicle’s value depreciates the minute you sign on the dotted line!

23 Jenna

I would add education to that list.

What type of debt have you sworn off for good? Credit card debt.

What type of debt are you comfortable with? Home and education.

Do you think you’ll finance your next vehicle? Hopefully get a sweat deal – researching that now.

At what point does debt go from being logical to being ridiculous? When you can’t imagine life without it.

24 pete

yo ninja, i like your dedication to being debt free. however, i think you are making some emotional decisions regarding good debt and a mortgage.

debt is used as a leverage for an investment. your net 401k contribution is opportunity cost debt in your savings account. however, you assume that the 401k tax deductions and investment market will give you a greater return on investment.

why not look at housing the same way? what is cheaper in your neck of the woods, renting or a mortgage. i liked mint’s renter’s manifesto: http://www.mint.com/blog/goals/rent-vs-buy/

25 PunchDebt

I think you might have misunderstood me. I do plan to take out a mortgage. I don’t qualify it as good debt, as owning a home outright is generally better than paying interest on a mortgage (even if that mortgage is tax deductible). I think of mortgage debt as tolerable, but I still would rather owe NO ONE money.

26 StackingCash

Definitely! Just make sure the mortgage is not so big. Sometimes it’s tough to refuse that big fat juicy loan banks love to give out to credit worthy people. In fact we avoided that Mack truck when we almost upgraded our house in Las Vegas at the peak of the market. Falling in love with a house is dangerous. I would recommend spending no more than 25% of your income on housing unless you want to take that chance to make Girl Ninja work if something happens to your income.

27 Ryan@TheFinancialStudent

I’ll never have credit card debt.

Student loans – yes

Mortgage – yes

Financed car – maybe

I’d like to never finance a car, but I’m not sure how realistic that is. I’m saving a little each month for at least a down payment though.

I’m also OK with using those 0% offers from stores like Best Buy or Home Depot, assuming I have the amount in full already sitting in a savings account. I know it takes some discipline, but I’d rather keep my money liquid for as long as possible.

28 Serendipity

1. I have sworn off credit card debt ( lucky enough to never ever have been in it in the first place.

2. I’m confortable with student loan debt. I’m probably going to really regret it when I start paying it back but for now, I know I’m going to get a good degree and hopefully a good job. I’m investing in my future.

3. I will probably finance part of my next car. I would really like to get a convertible as a graduation present to myself so we’ll see.

4. I don’t know if it’s ridiculous debt I’m tired of as much as it is people being financially irresponsible, not paying bills on time, living outside their means, etc.

29 Kim

Dude, I hear ya’ on the mortgage – we live in an equally expensive area (DC). Just thinking about how long it will take to save a 20% down payment turns me into Debbie Downer.

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