Forever In Your Debt

Human Calculator Jim Hinckley suggested to me this week that I should consider writing a blog entry about mortgages. Or more specifically, about my thoughts on mortgages, and debt in general. He always knows just the right button to push to get my head spinning (I just know he's going to wind me up on Income Tax filing in a couple months). It's probably part and parcel of being a machine-in-human-form, but I've learned to think of him as mostly harmless.

Anyway, it's true that I have pretty strong convictions about good borrowing and bad borrowing. Some of these principals stem from growing up relatively poor, which is to say having a family income that was below the poverty line, not living on the street or having to pick pockets to survive. Those years impressed upon me the value of money, and the ease with which you could move from having enough (a brief period during which I had an unlikable, but very gainfully-employed, step-father) to not. So an... appreciation... for finances comes naturally to me.

Also, I saw first-hand how crushing debt can be for someone if there isn't any opportunity to get out from under it. My (single parent) mother had charge accounts everywhere, and while she was quite responsible about what she bought, nearly every significant thing we owned started off with installment payments attached to it! I wasn't savvy enough in those days to realize the actual cost of this, though; and I suspect she wasn't either, as she continued digging a hole that we'd never be able to get out of. All I knew was that we didn't seem to have much compared to my friends, and yet there were always more bills than there was money to pay them all. And this is living in a 2-bedroom apartment, driving a Chevy Chevette with a 6-year car loan attached to it, and living from payday to payday (just barely). Not exactly keeping up with the Joneses! In hindsight, the reason this situation continued to get worse indefinitely - eventually cancer solved the problem, before I ever got to a point in my life where I was working and could've fixed it - was that my mother actually believed she was staying ahead of the game by putting things on credit. In her defense, she was probably just uneducated about such things, and too far below the poverty line to do anything differently and still keep both of us in clothes, fed and with a roof over our heads. But the illusion that she - and so many other people - bought into, was that she could afford more because she could charge some of it. No one was there to explain the mathematics of the situation (where was Jim Hinckley when we really needed him? ah, probably in diapers now that I know about it!)

Nowadays, according to Tammy, the heinous nature of credit cards is actually something that's taught in high school. Those bright young minds - not yet dulled by alcoholic binges - are at least given the data to live by, whether they choose to or not. They're informed of how a $3000 big screen TV, if you put it on your credit card at 21% annual interest, and took a few years to pay it off (probably making minimum payments most of the time, especially at the start), will actually end up costing you twice as much as the sticker price, or more! I doubt my mother ever heard such a concept expressed in her life, despite the fact that she lived it for the last twenty years of her life.

What I've taken away from all of this, over my life to date, is that most debt is bad. If you're in debt to buy what you need, it might be unavoidable; but the vast majority of people who are "in it up to their eyeballs" are financing all kinds of wants, not needs. If debt were cheap - say 1% or less - that wouldn't be so bad. But when credit card companies can charge you 20% or more - and yet still manage to avoid being considered loan sharks - it's simply insane as a financial strategy. It's why people end up consolidating debt, and declaring bankruptcy, and finding that even a several-month-long work stoppage can bring the whole house of cards tumbling down around their unsuspecting heads.

(Anecdotal aside: Back around 1999, Vicki and I had a friend with his own business who'd gotten into deep debt and was despondent about how to ever get out from under it. Vicki and I discussed it for a few days and decided that the best thing we could do to help him was to loan him the $25,000 it would take to clear all of his debt, and then he'd only owe us. He was appreciative, of course, and wanted to talk about what interest rate he thought was reasonable. We explained to him that the only interest rate we'd consider was 0%, because our goal was to allow him to get out of debt, not simply transfer his debt from others, to us. We set up a repayment plan that he could afford, and that would take a little over 8 years to complete. He still experienced some financial challenges after that, eventually selling the business, but he was able to tackle all of that because he wasn't spiralling downward anymore. And he just paid the last part of the loan off last week, as a matter of fact. Some of our other friends who knew what we were doing thought we were crazy, at the time, to take a chance like this, but again: I knew from experience how crushing debt can be. And our rationale was that the potential gain for his situation was a lot greater than the potential impact to us, if he never paid a penny back. Which is not to say that $25,000 was chump change to us then - or now - but simply that we could afford to lose it more than he could afford to fall into a hole he'd never get out of. I share this personal tale simply as an indication of how strongly I feel on this topic. It was a case of putting our money where our mouth is, if ever I faced one. And how about Vicki, for not just going along with it, but being behind it 100% at every step?)

Since most debt isn't cheap, and isn't incurred just to meet basic needs, it's bad. But credit cards, I figured out long ago, aren't bad! They can be used very effectively, and actually make you money, instead of costing it! Any card that provides reward points of some sort that you actually use, and which doesn't charge any usage fee for the cardholder (such as an annual fee), is a great vehicle for fattening your wallet (by not lightening it). If you limit yourself to only buying what you can afford - meaning what you have the money right now, in the bank, to pay for - then it's a great strategy to just charge it all! But the catch is: you have to pay off the entire balance every month! Assuming you've got the type of card described above, there's no cost to you whatsoever in doing this, and then you collect the points and pay for that vacation you can now afford, or buy groceries, or whatever. It's like free money! And it's even legal!!

For me, there're only two things you should ever go into debt for: a car, and a house. In this day and age, those both pretty much constitute needs, especially if you're not in a position to live close enough to where you work to make walking practical. Public transit's not for everyone, and if you're making any kind of reasonable income, you probably can make a good case for needing a car. One thing Vicki and I discovered that helped us get out of the car loan cycle was that you generally keep a car longer than you're paying for it. In other words, your car loan gets paid off, and maybe you keep that car for another year or three before deciding to trade it in and get a new one. If during that period, you take the money you'd previously been paying onto the car loan, and stick it into savings for a new car, then the next car loan starts off that much smaller. Repeat that a few more times, and pretty soon you don't need car loans anymore. You're saving the money up, earning interest, and then buying the new car with cash. Of course, these days 0% car loans aren't unheard of, and I've got nothing against them, if you can get one!

And then there's the mortgage, which is where we started. Hinckley thinks I don't ever think about mortgages anymore, because I haven't had one in over 5 years now. In fact, I'd paid off two mortgages before I reached the age of 40. If you want to see what a single-minded, goal-oriented person looks like, you should've seen me as Vicki and I slaved to pay off our first house together. We both worked for the bank back then, and as such we had great access to mortgage calculation tools, well before the explosion of the Internet made them freely available to all. I learned a whole lot about how mortgages work, just from playing around with that mortgage utility. For example, I discovered that making a bi-weekly mortgage payment just $100 more than what the bank required could knock a year or two off the life of the mortgage! And that taking the after-tax money from our annual bonuses and plopping it down on the mortgage, early on, could save us several times that amount in interest that we'd never have to pay! I became the Mortgage Terminator. I tracked that sucker every pay, and chopped it down every chance I got, until we'd paid off a 25-year mortgage in 8 years! There I was in my mid-30s, owning my own home! It was an awesome feeling, and the Mortgage Burning Party we had wasn't bad either!

Eventually we upgraded, and I found myself back in Mortgage Land, but having slain that monster once, it didn't daunt me at all. We had a plan that would've paid the second house off in about 7 years, but then serendipity smiled on both Vicki and I and we received generous severance packages from work that allowed us to pay the mortgage off in a fraction of that time. Obviously, you can't count on that sort of thing, but even without either of those windfalls, we'd be owning our second house right about now. And with the first house, neither of us was making a whole lot of money; we were simply committed to making our money go further, and paying off debt forever ain't the way to accomplish that.

So clearly I do still think about mortgages, and the fact that they're not evil; but they're also something that you're better off without, as quickly as you can manage.

Did I mention that Hinckley knows how to get me going?