Far better it is to dare mighty things, to win glorious triumphs, even though checkered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows neither victory nor defeat.

Theodore Roosevelt, The Strenuous Life

By , on April 18, 2010

Managing Debt, Money and Finance

My apology for not writing much of late, but like many of you my focus was on filing our income tax return. Accurate completion is not particularly easy, with the two most challenging tasks being accumulation of needed financial information and trying to assure that all lawful deductions and credits are taken. This year was a bit interesting; the sales tax on our new truck added to our standard deduction. Sweet.

This is a good time to segue into the broad topic of personal finance. To me, our handling of money is analogous to diet in that we must adopt to changing needs and circumstances throughout our lives. Of course, the analogy fails when discussing savings. Saving money is considered a good idea by most of us, but saving energy in the form of a wide girth is not a good thing.

I will start this series of posts with some value judgments, reasons I think that warrant indebtedness. They are:

1. Education: Education is a way to change your life for the better. Going into debt for it is a reasonable thing to do, especially for young people who have a reasonable expectation of increased income for many years in the future by getting their degree.

2. Mortgage or Trust Deed: Signing a note in return for a security interest in a modest residence is a necessity for most of us. My rule of thumb is be able to own the property or a similar property unencumbered with a loan within 30 years of your first mortgage. Thus, those moving cannot continue to have new 30 year loans after signing the first one.

3. Clothes for a Job Interview: The risk of not having the right clothes for an interview is far higher than a reasonable indebtedness to make the right showing.

4. Your First Car. Never buy with more than a four-year loan and keep the first car purchased this way for at least eight years. For the last four years, pay yourself an amount equal to the loan payment. Any future car loan is taken because of a very low interest rate or no-interest offers. The cash exists to pay the entire amount owed at all times.

5. Emergency expenses that occur which cannot be covered by savings.

In general, begin to view each debt you have as a risk to your future. Except when you are young (less than 40) try to have enough cash to cover your highest debt, even your mortgage if it is adjustable, in its entirety. Set a goal to have enough cash to eventually cover all consumer debt and your residential mortgage in its entirety. This does not apply to debt incurred for investments and businesses, but the residence you live in is an expenditure, not an investment.

I have not yet met a consumer approaching or coming out of bankruptcy that had not signed a loan contract that contributed directly to the dire situation. We must all be careful with what we agree to sign, and thereby agree to pay.

1 Comment to “Tax Returns are Done!”

  1. Tony Woody says:

    I totally agree with your 5 things that warrant indebtness. I think the key is to be aware of what you are doing when you get in to debt and understand the long term consequences of debt.

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