DEBT…the A (avoidable)-- hole:
Last blog, I mentioned “Poverty Poker” where the masses have to ante (taxes) but have no money to bet (invest). Thus the widening divide between haves and have nots.
When I do presentations to seniors at colleges and universities, one of my focuses is debt. There is ‘good’ debt and ‘bad’ debt. Good debt is when you borrow money to purchase something you can’t afford but that will appreciate. A house is a good example…if you buy it right: in a good location, at a good price, with a decent interest rate, and with a payment you can afford without strapping yourself. (You are only ‘entitled’ to a house you can afford. It’s easy to get carried away.) Also important is to be able to ‘time’ when you will need to sell it. Until the ‘Great Recession’ many of us forgot houses can DEpreciate. And: you’re only entitled to a house you can afford.
Student loans are another example of good debt as your earnings could appreciate with a degree. But, keep your loans to a minimum and be aware if you’ll make enough in your field make the loan payment, i.e., a Harvard degree for a social worker. Something I read once that is only ironically funny: “Thanks student loans for helping me get my degree…I’ll never be able to repay you."
‘Bad’ debt is when you borrow money to buy shit you can’t afford and don’t need…things that will depreciate. A luxury car the best example.
So, a new even worse game came to my mind: ‘Debtors Poker.’ This is where you ante and borrow to bet. This is where people get in the most trouble. You can lose more than just your ante and can end up in a hole you never get out of. A prime example is when people borrowed against the equity in their homes, sometimes, foolishly (by both unscrupulous lenders and homeowners) for more than the home’s value. When the Great Depression settled in, many homeowners were ‘under water’ (I believe you’re drowning when under water?). They owed more than the house was worth. Foreclosures were, tragically, high.
If you’re going to play any kind of poker, only bet what you can afford to lose. I hate to point this out, but much of the divide between rich and poor is self-imposed. You can get angry at me for saying this, but, I was a fincial advisor for almost 30 years. I’ve seen it. Although wages have remained stagnant, the sale of luxury auto’s has gone up 40%. Credit card balances are through the roof. If you can’t pay off your credit card balance every month you’re living beyond your means, spending more than you make…which, of course, is not sustainable.
Bottom line if you want to increase your net worth and narrow the divide: have a cash reserve but learn to invest. You’re falling behind with $ in the bank. Pay yourself (invest…at least 10% of wages… I know it may not be easy) FIRST and regularly. Live on the rest (I.e., within your means). AND, get or stay out of bad debt. If you’re in debt, you can’t pay yourself, and you will most likely not be doing in retirement what you expected.