Debt: Just Because You Can Doesn’t Mean You Should

I was listening to a commercial on the radio last night and it went something like this: “Need relief from debt collectors? Try bankruptcy! The negative stigma surrounding bankruptcy has vanished. It’s gone! Poof! So call today and ask how we can get you on this easy path to freedom.”

So that’s it, I guess. It’s time to let loose! It’s like in the Hunger Games where the Capitol people eat until they’re bursting, drink something to make themselves throw it all up, and then eat some more. Harmless. Except for that when you drink the bankruptcy fluid, it burns your stomach and it can take years for you to get to the point where you can gorge on that food again. You have almost zero options to obtain credit while your bankruptcy is still going, and then afterward your credit score has been so damaged that it can be difficult to get insurance or a loan at a decent rate, if at all. Tastes like freedom, doesn’t it?

Credit cards

Every once in a while, I like to play the game “Let’s Max Out All Our Credit Cards” with my wife. In it, we discuss all the things we could do if we were to max out our almost $40,000 in open credit. It would be fine, right? 40 Gs isn’t really that big of a deal. I actually just read a story the other day of a guy who was able to pay off over $100k in credit card debt in a few years. Why not have a lot of fun now and then just work like a banshee to pay it all off later? I want it, and I’ve got the credit to do it.

NO.

Credit cards aren’t evil by any means. We’ve gone on quite a few trips this year that have been sponsored by our cards. But if managed irresponsibly, it’s the most crippling form of debt. Not just because the interest rates are so high, but because it’s so readily available and easily obtained if you haven’t already ruined your credit by abusing it. Having a credit card on hand makes it easier to justify your wants. So if you’re someone with a lot of those and you’re not very good at controlling yourself, you may want to stick to a debit card or cash.

Mortgage

There was a lot of greed going around before the financial crisis hit in 2008. At the time, pretty much all the blame was laid on the big banks that were making it easier to get a mortgage than a new puppy, and the big investment firms that were securitizing toxic subprime mortgages. In fact, some people still believe it was all their fault. But the problem originated when laws were passed that made it easier for people to get mortgages. And what did the American people do? Instead of thinking about what they should do, they focused on what the new regulations said they could do.

In the end, the only reason those mortgages were toxic in the first place was because homeowners overextended themselves in masses, and then simply walked away when they realized that as much as they thought they could do it, reality set in and they realized they couldn’t. Yes, greed was everywhere. But the fiscal health of a nation rides on the personal fiscal responsibility of its people.

As of right now, we could afford a mortgage. At 28 years old with a wife and 7/9 of a kid, a lot of people would say that’s the next step. But getting one would strap us down to a 30-year commitment that I take pretty seriously, so I’ll wait until we have that feeling that we both can and should.

Car

I work in the auto industry and I see people every day who are paying 20% or more of their gross income. Why do people do it? Because they can. Loose lending practices are getting looser, and before you know it, we’ve got a subprime market 2.0 on our hands. Ahh, if only we still had debtor’s prisons…

When I’m looking over auto loan contracts all day, I’d be lying if I said I wasn’t tempted to go out and load up on debt to get a shiny new car. I’ve got excellent credit, and I have the income to do it. But just because I can, doesn’t mean I should. By adding a $300-$700 payment, depend on how shiny and new the car is, I severely limit my ability to take care of more important things. I’ll always remember meeting couples when I did financial planning who were so loaded up on mortgage and car debt that they couldn’t afford basic life insurance to protect their families if either parent were to die.

There’s nothing wrong with having a shiny new car–if you can afford it and you have the important things covered.

Just because you can…

The moral of this story is that you can do just about anything with debt in today’s fiscally loose environment. But before you start racking up credit card debt, lock yourself into a $200,000 mortgage, or buy that brand new car, ask yourself if that’s something you really should be doing at this point. Or if there are other things you should be doing to prepare yourself to be financially independent. Personally, we’re working to build up our emergency fund so I can one day write full-time. We’re also trying to pay off the debt we already have before we go out and get more.

As much as sometimes I hate renting, driving a paid-off ’98 Honda Civic, and having to save up to go on nice trips, I’ve got enough debt to make me feel like I’m in bondage. I don’t need more.