I have had a slight change in thinking on the "no debt" front. Actually, I had a bit of an epiphany which I need to mull over a bit -- what better way than here in my site on taking control over money. I mean, I have already discussed the difference between good and bad debt ("Not All Debts Are Created Equal") and lots of other things about balance. But lately I have noticed that there are a cadre of people out there who are trying to get Americans, the richest people in the world, to think they are poor. The idea is that we have too much debt and not enough savings. The New York Times had an article yesterday about how financial planning institutions are scaring Americans into "oversaving" for retirement at the expense of living today. The other part of that equation is the notion that we are spending more than we can afford and taking on far too much debt. Frankly, lately, I think I am becoming a member of the debt police. NO MORE. Instead, I no longer wish to be obsessed with the goal of NO DEBT. It is unattainable for my family at this point in our lives.
A Different Perspective on Debt: It Depends on What You Can Afford
Here it goes, but, if you can afford to take on debt, and it is neither for living expenses (which means you are overextended) or for frivolity (in your opinion), go ahead, I say; use debt. Companies use debt to grow; the federal government uses debt to grow; wealthy individuals use debt to gain wealth; thus, so can middle-class families. In fact, I think it would be impossible to secure some of the nice things in life without a little bit of debt now and then. I know our parents sacrificed more than us, and I hear that my children supposedly will never be able to live as well as my family, but I am no longer buying into the myth that we must sacrifice every bit of pleasure in life to be "debt free." Maybe some of us do for some time, but not all of us, and not all the time. I know it is an unusual thing to say, in the age of the debt police, but, give me a chance to explain my thinking on the subject before you blast me out of the personal finance blogosphere.
Huh, What you Talking About, Willis?
It is hard to know where the change began. But this week, I decided, with my husband, of course, that to get our finances further in shape, we need to take on more debt. I did the math and the math made sense for us. So, where did I finally come to a zen-like acceptance of a longer life of debt? It happened this week when I decided to stop living as though I am poor. It is killing me to live this frugally (although to some, you would love to cut to the amount of money we spend a month). We are not poor -- in fact, my husband and I make a fairly good living. But debt got us in trouble, so, we became fixated on getting rid of our debt entirely. For a while, the debt police convinced me to live as frugally as possible even if that sucked the life out of me, made me impossible to live with and took away a lot of my physical health -- true story.
This week I changed my thinking to reflect the fact that we are not poor -- we just have a cash flow problem. There's a huge difference and the debt police do not notice that difference. I think we must start noticing the difference between being in over our head and having a cash flow problem. If you are in over your head, you need to take drastic measures. If you have a cash flow problem, you need to make changes; however, those changes might not be as drastic.
Why The Change of Heart?
A few things happened this week that made me reflect on our situation -- up until now, I was obsessing and looking for solutions to make the debt disappear. What happened. First, I read a Forbes Magazine article about America's deficit and trade imbalance; second, I pretty much fired the woman who cleans our house once a week because I believed (perhaps correctly) that having her clean was an "unnecessary expense" that we can no longer afford. Third, I read Dave Ramsey's book, "The Total Money Makeover" and developed a strong distaste for Dave Ramsey after being lured momentarily into his way of thinking? Then, i realized that I was proud of my son's purchase of a new HDTV from Best Buy on their dime for 18 months even though, as a card-carrying member of the "debt police," I should have been outraged and showed him the error of his ways. Finally, I read the responses to an online article from one of the big money magazines (I can't find it again). The author was chastised for expressing her argument that maybe it was time to stop obsessing over our debt. The response was overwhelmingly negative essentially accusing the writer of drinking the Kool-Aid provided by the credit card companies. Somehow, all those events gelled in my mind and I realized that getting completely out of debt instead of accepting an offer of a second mortgage on my house is short-sighted thinking -- in fact, I am thinking as though I am poor when my husband and I earn a substantially decent living. Thus,I have some new ideas and, the first, is to get rid of the debt police altogether and take back the freedom to live your life.
Could Dave Ramsey Be Downright Wrong?
I'm not sure, but I may loathe Dave Ramsey. I have been reading his Total Money Makeover, which, by the way, has some sound, but rather basic ideas: get out of debt, save emergency money, save retirement money, save for college, save for a house, then, you can have a life "like no one else's." At first, I got sucked in; but, I found the book off-putting. Part of my reaction was to the many Biblical references: I am not a Christian and do not think of debt as a sin. But I am still reading because, at first, I liked what he had to say. But the more I read, the more it struck me that it really is proselytizing: not so much in the Christian way, but as a form of belief system that "Debt is bad. Sacrifice all to get rid of debt." In fact, much of what he said makes me feel as though all our hard work is for nought since we are to sacrifice the fun of life until we have all the cash necessary for it. Maybe I should have read what he had to say before I got into debt at all: it does seem as though it would be great to live on our income debt free -- then, we would be "rich." But I do not want to start living like a pauper to get to that illusive goal. I work way too hard and make way too much money to live like I am poor.
And, what if we die before we become debt free, but after we have stopped living and only obsessed on our debt? Not being Christian, I do not think I will be rewarded in the afterlife for sacrifice for its own sake.
I am not saying to live beyond your means and go into debt to be fancy. I just do not think I have to throw every dollar at my debt until I can go out to dinner. I know that Dave Ramsey fans will think I have not actually had a "change in my heart," but, actually, I have. It started months ago when I began to realize that my debt is overwhelming and started taking steps to eliminate it. But, listening to Dave Ramsey is not feasible for me: I don't want to do it. It is too stressful to work as hard as my husband and I do and to not have any time, energy or money for fun. Why would it be so terrible if I did have debt along the way to enjoy my life? To give my kids the kind of life I want for them? To give them the kind of college educations that we have promised to them? That is what we worked for all these years: a certain lifestyle and the opportunity for our kids to have that lifestyle or better. Lately, I have gotten so obsessed by eliminating the debt that I have actually forgotten to live -- the debt police took away my liberty; they wanted to lock me up until ALL my debts are paid off -- no take out for you woman, cook, cook, cook. No cleaning woman once a week: clean, clean, clean. So what if you work every day and on the weekends -- and you get up at five a.m. ? Can't you do a little more for yourself and your family?
The Debt Police are Everywhere
Dave Ramsey aside, many of the articles I have read, on-line and off, and the many books I have read on the subject agree: debt is bad. The fact that so many in our country have debt means that we all must feel guilty about it. As Warren Buffet says, "get rid of the guilt." It is not so bad to have debt to have a reliable car (and, if you already have one that is a bit pricey, so be it if you earn sufficient money to pay for it). It is not so bad to be in debt to own a home or to renovate it to your liking if it will make your life better. My home has gone up 2 1/2 times since we bought it. It is a great house and it has been a fantastic place to live. We could not have bought it without a mortgage, at least not while our kids still lived with us, if ever. Honestly, I suppose we could have lived in the 1100 square foot bungalow that we started out in and lived in until my oldest was 12 and my younger was 9. Why wasn't that good enough for us? Because we have worked so hard to attain a nice life, and, I know I should not feel guilty for wanting the nice things in life: I am not stealing them, I am working for them. According to Dave Ramsey, though, it probably should have been enough because, quite honestly, although my house payment is about 21% of our gross monthly income, our slide into debt started with those doubled payments: the house was more expensive, the taxes and insurance were higher, it needed more funiture and more upkeep. But it has given us the room we needed and it is in a great neighborhood a few blocks from the high school and near the beach. It is a worthwhile house and I am glad to have it.
But the debt police made me question my decision to live in this house: how can I justify having all this "wealth" tied up in my house and, at the same time, have debt that is increasing in order to put my two kids through college. So, as I was reading Dave Ramsey, I thought about selling my house. Selling my house!!!! My husband almost feinted at the mention, my sister tried to be supportive, and, I, well, I got more shingles. (I have had shingles ever since the debt police came into my house in the form of all of my reading).
I am so afraid of debt as a result of it being so wrong to be in debt, even though WE MAKE A TON OF MONEY AND CAN PAY THE DEBT. Not easily though, which is why I went on this journey to get out of debt. But, my journey has gotten out of hand, and I need to refocus.
A Shift In Thinking
Aside from my foray into Dave Ramsey's mania, I also read two articles this week that re-energized me and made me feel less stressed out about debt. The first, in Forbes, was about the country's deficit and trade imbalance and reminded me that I have been seeing a new theory emerging lately: the deficit is actually a reflection of the wealth of our country. Like wealthy people, our country creates and generates more and more wealth which it spends, in other countries, on goods and services that we no longer make efficiently ourselves. Forbes claims that rather than apologizing for our trade imbalance, we should be celebrating our wealth growth. Hmmm.... I thought. Sounds like a weak excuse for the deficit though: we are spending more than we are taking in. Again, the answer is that we are building wealth by doing so; hence it is alright.
The second, in one of the big money magazines on line was whether or not "debt" is bad or if we are being sold a diet of fearing debt so much that we are afraid of it regardless of whether or not it can help us. It was not the article to which I responded, but to the responses. In fact, the message of the article was weak: it somehow justified the use of credit for frivolous things even. However, the response was so negative that I became concerned: Do Americans fear debt so much that they shackle themselves to the debt police and forget to live? Do I?
What do the Debt Police Have to Do With Me, or You?
This was my dilemma. Here we are making all this money and yet, we are living poor. I believed, correctly, that some of that resulted in poor choices made over a number of years. But in my effort to rectify, I overlooked the most important good choice we made: the wealth sitting in my house. And the debt police had me convinced that I could not use that wealth to get out of my other debt because, if I did, I was just trading debt for debt and not really getting rid of debt at all. It is true, I am trading debt for debt: however, I am trading debt that is currently at an interest rate of up to 20% for debt that, after taxes, will be at an effective interest rate of 5.4%. Why is this not a slam dunk? First, because I will be paying 5.4% for longer than if I just keep snowballing to get rid of the debt I have. But, the real reason I resisted this second mortgage is because I thought it went against the messages I have been hearing over and over again: NO DEBT IS GOOD DEBT. So, how can taking on this debt be "good?" Well, for one thing, it cuts our expenses by $1,000.00 per month!!!! Imagine if I invest that at 10%. My fear, of course, is that I won't invest it and I won't use it to pay down the debt; instead, I will go back to my old ways and spend it all and we will again ring up new debt and get back up to that $1,000.00 being spent on debt. I am grateful to the debt police for teaching me NOT to do that. How can I know that we will not backslide? I am now educated and my husband is educated in how debt can hurt when you can not afford it. But using debt to get out of debt is the best thing we can do for ourselves financially, emotionally and physically.
It is not One Size Fits All
I have never been able to wear clothes that are one size fits all. I'm shorter and heavier than that size, I guess -- or, so it always seems to me. And our debt and income is not the same as yours; neither is the value of our house. Our debt that we are getting rid of with this new loan is ALL our credit card debt, one of our two car loans and our adjustable rate home equity line of credit. We are also getting rid of the remaining payments on our time share that was one of our only true financial regrets in life (the other was not paying attention to our spending habits -- a much more insidious issue than a bad purchase).
That debt is sitting on my back -- all of it -- and dragging me down. It is making me unable to sleep at night and making it more difficult to enjoy life. But the debt police have made me believe that I should not sleep at night until I pay it off; that I should live with my shingles; that somehow, if I take the "easy" way out and use my house to rid myself of the bad debt, I will be a bad person and never be done with debt.
In my case, the debt police are wrong. Why? First and foremost is we can afford this debt. We have worked hard in these past seven months to bring our spending in line with our income after our fixed expenses including our debt payments. We have struggled to get there, and, it means, almost no room for any sort of fun -- our entertainment budget is next to nothing. We have been tracking our expenses using YNAB Personal Budget, an excellent way to monitor cash flow and keeping track of all of our accounts on Quicken ( Save up to 36% Off Quicken 2007 Downloadable Products) and, so, I know how to take control over my money.
When I started this journey to take control over our money, I wanted to become debt free and gain wealth without making a substantial change to our lifestyle.That is not possible: the substantial change may not be in the big picture ways you live, it may be in just keeping track of what you spend and making choices when you spend, but you need to make changes.In our case, we had to switch our debt for a longer term debt. Our income permits us to do this, and, financially, I think we will be much healthier. Will we jump out and ring up the credit cards again? Absolutely not! This is the one place the debt police are absolutely right: credit card debt will eventually choke the life out of all your hard-earned dollars. But that does not mean you can never spend money before you have fully saved up enough to buy something. This is where the debt police are wrong: if you have a healthy income, and you can afford the monthly, and, you know exactly how much moreyour credit is costing than cash would have cost, go ahead and enjoy.
You Only Live Once
This is what should scare you about the debt police. They want you to put off all your hopes of the "good life" until you can pay for the good life in cash. I am not suggesting that you entirely mortgage your future for now; in fact, my husband and I are saving a healthy amount for retirement (and I have a pension and we are maxed for social security). Save always. Keep track of what you spend. And, if you really want something now, and it will bring you pleasure that is lasting (remember that few things bring you pleasure, but never having a vacation might bring you pain), go for it IF YOU CAN AFFORD IT in cash or in debt. Three years ago, our central air conditioning blew out. We could have saved the $8500.00 for it over the past three years and sweated our butts off -- or, we could have done what we did -- we paid an additional $900.00 over three years to get the a/c then. With what we have learned in the last seven months, I would not change that decision. However, with what we have learned in the last seven months, I also know a new truth. We will not blow the extra money we will have from our paychecks minus the new loan: we will save it for our boiler or whatever should blow in the house next. We do not have the money to put more monthly payments into our lives. I know that because the debt police scared me. I thank them for doing their job. Now, they can go away, stopping by now and again to make sure we stay on the straight and narrow: but, no more shackles. We have taken control over our money. We have learned to manage our debt and our wealth. Would I like to be free of all debt? Yes. if I were younger, and had not gotten into the debt I did, I might have been happy to get some better skills to avoid some of that "bad" debt. But I should hope that I still would have bought my house and cars and some other things. I might have had excellent credit like my son and gotten an HDTV for $50.00 per month with no interest at all for 18 months. I just might have been a little less free with the credit cards. So, I guess my new thinking is that debt free is a good goal, but it is not the only goal. Living well is a good goal as well. Living well and within your means, even if that includes debt, is really the best solution if that is possible. It is all just a matter of making choices to take control over your money.