Debt
The Bad and the Ugly
In the last blog, I reviewed what I see as ‘Good’ Debt. Today’s discussion will focus on Bad Debt, Ugly Debt, and some financial strategies I would apply if I had a ‘do-over’, restarting as a 25-year-old.
The Bad
A bad (or not as good) debt is a purchase you NEED to make, but you don’t have the money to pay for all of it now. For example, you need a reliable car to get you to work, you need to move for a job. Even though you are purchasing for a ‘need’, not a want, you still need to be able, comfortable, and diligent in paying this debt off; the sooner you do so the better because this debt is draining away your income. Before assuming the debt, ask yourself, can I function without this purchase (answer should be no), and can I pay it back (answer should be yes). If you can live without it, or you will have difficulty paying it back, this becomes an ugly debt.
The Ugly
What is ugly debt? One of the worst advertisements I remember seeing was for a credit card company. The message was people ‘deserved’ a vacation and therefore should take one even if they hadn’t saved for one and couldn’t afford it. And the ad then had people putting the vacation on the credit card as the ‘solution’. This is good marketing, but a terrible, ugly idea.
If it is something you don’t need, something you can’t afford (you can’t pay for it today), going into debt to get it is ugly debt. What makes this debt even uglier is much of the time it is carried on credit cards, which charge 20%+ interest. This is like dealing with a legal loan shark. Avoid any ‘buy now, pay later’ incentives, unless you can pay now.
A quick google look shows credit card ‘balance’ in Canada at $4500 per consumer. The US is $7000 per borrower. Assuming this is the balance after the monthly payment has been made, it is ugly debt. If your credit card balance is paid in full every month, you are not really carrying any debt, and may get cash back, so this can be good, but only if you always make full payments each month. How much credit card debt does the average Canadian have? - MoneySense
A Few Good Strategies
If I had a do-over today, what would I do financially? I have applied some of the following, but not all. I believe if one applies as many of these as possible and does them as early in their financial life as possible, they will be soon secure in their finances.
1. Make up a budget. Know what your earnings are each month and know where you are spending this money. If you can’t plan it and measure it, you can’t control it.
2. Pay yourself first, savings should not be an afterthought. In your budget you should know how much you spend on the big items (lodging, food, transportation, etc...) You should also ‘know’ how much you need to save this month. Make these savings a priority. Pay yourself each month, and if the money goes automatically into a separate account, it is even better.
3. Have 3 months of ‘survival’ money saved and accessible (in easily cashable investments). If your monthly cost for minimal survival (shelter, food, payments and work) is $3000 per month, save as much as you can monthly to build up $9000. I know it is tough, especially when you are starting out, we didn’t get this in place until quite a few years after we were married. This amount will help you to navigate many of life’s issues without requiring debt. The loss of a job, a car breakdown, a health scare.... many of life’s challenges and costs will fall into ‘3 months of living’ threshold, and if you can afford them without debt, you will be far ahead financially.
4. Invest. The best way you can get to a place where your ‘money is working for you’ is if you save and invest. One can spend the money they make and ‘live for each moment’. I understand the alure of this approach, however, this enslaves one to a frugal retirement. I believe a better approach is to live so you can save and invest and thereby be able to retire knowing you can then do a whole lot of ‘living for the moment’.
With these strategies, you are/will be well on your way to avoiding the ugly and bad debt, and could be quickly pivoting to thinking, where is the best place for me to invest come money.