borrowing for an item that depreciates is the concern.
Since a house appreciates (ignoring what happened in 2008 for a moment) taking out a mortgage that is 25% of your monthly income is not a bad thing.
Saving to buy a car with cash is better than making payments.
Being wise to the system is key - wise in a biblical and logic manner, not the wisdom of the bankers and wall street and credit companies. We can use the system for our own good if you remain sharp and alert.
I use credit cards - and pay them off every month. Collect points I use for vacations. My car has 218,000 miles on it, originally bought with a loan, paid for as a business expense.
I have a home office (and you should too) and when my kids lived at home they were paid handsomely for filing and emptying the trash. They then used that money to pay for their expenses.
Having a zero credit score means living off the grid. Doable, but difficult and not likely to happen for most folks. Too much fun you'd be giving up. Be in the World - Not of the World
I agree with you that one should take loans only for things that have a long term payoff or are key for advancement of your long term goals. It is after all a loan from your future self. So if you are going to tie yourself to a bill make sure it was for something tangible and needed.
I don’t buy into the idea that a House will appreciate. It might, but for us it was cheaper than renting, you have more freedom to alter the house than renting, it is has tax deductions tied to it and it is currently one of the best ways to save money for the future. In the USA it is the expected way to build up financial assets for the common person.
I also don’t by biblical logic in the matter. The bible makes it very clear that Christians are not to charge interest, most do. I’m sure there is some justification but like most things you can justify just about anything with the bible.
As to being off the grid, really that is for another discussion, but no, not having a credit score does not take you off the grid. It will flag you as someone outside the norm however, possibly bucketed for further research.
I have been around the financial and estate services industry for close to 30 years.
I'd be happy to visit with you by phone for a short while to dig deeper into your questions and offer some direction
"Pound Foolish" by Olen
I can not recommend a single book as the be-all and end-all of personal financial planning. I would recommend you spend some time in the brick and mortar library and maybe spend the coin to take some basic accounting and finance classes at the local community college.
As an example, two well-known financial advisers, Suze Ormon and Dave Ramsey, hold similar views on maintaining a liquid emergency fund. Well and good, but the amount of an emergency fund advised seems excessive, Ormon was recommending 6 months gross income at one point, and Ramsey would have you not make contributions to an employer-matched 401k plan.
One of the reasons I like Olen's book, is it points out things like Ormon's waffling on emergency funds* and how much more you'll pay in interest if you follow Ramsey's advice.
*Raising a broader issue, this is a bad term for those who actually do save 6 months' expenses. We could get a brand new car and pay our out-of-pocket-max for healthcare and still not eat up 6 months salary. It's a long-term-unemployment fund. I wonder if the name stops people from setting it up.
I may have to check out that book. I was given Ormon's book, but I really did not enjoy the book at all. After years of textbooks her book just was hard to read.
As to emergency fund, watching what has happened with the economy has had me questioning x months rules of thumb. I can see having enough to cover the yearly limit on your medical coverage, or perhaps enough to buy a basic car. Really I would rather have it linked to some personally calculated level that is clear what is expected by an economic bump in the road vs the road collapsed.
If you lost your job would 3 months be enough? Would 6 months be enough? At what level do you expect your emergency fund to cover the event?
It makes more sense to me to keep a credit line and the funds in CDs that can be accessed after say 60 days or some such. That lets you build some income while still being able to deal with economic shocks. Again the question is what level of economic shock are we preparing to deal with?
The thing is, of bad things that can happen, some are 3-4 figures (car repair), some are low-5-figures (medical crisis with insurance), and some are 6-figures (federal indictment, long-term unemployment). 6 months for us is mid-5-figures, which doesn't fix any realistic scenario. I keep reading that today, you're either unemployed for a short period of time (low-5-figures), or you're unemployed forever (6+-figures). But I'm not leaving 6-figures liquid.
My hunch is someone crunching the numbers would probably come up with paying for good disability insurance over preparing for more than 3 months unemployment, especially if you're confident in your ability to get good investment returns.
I agree with getting good investment returns, but you have to invest. Having a standing savings account with 5 figures in it seems like a lost incomes stream if you have a credit line of the same 5 figures that can take the initial shock then get paid off when the investments become available to pay off the credit line.
You do pay more in interest following Ramsey ... but, it shouldn't be much. The idea is to pay everything off as quickly as possible. A few additional interest points isn't all that big a deal over the short term. Its when they continue into perpetuity that the interest kills you.
Ramsey's theory is that money problems are behavioral problems, not math problems. While the math works out a little better paying off the highest interest rate first ... paying off the smallest debts first, regardless of the interest rate, is intended as a motivator so you see quick progress, and so you have more available to hit the bigger debts when you get to them.
There are exceptions to his "smallest debt first" rule. IRS and State tax debts always go to the front, I've heard him suggest moving outstanding traffic fines/ warrants to the front of the line, and I think payday loans or some equivalently stupid 800% loan jumps to the front (though those are usually smallish debts anyway). So, there is some consideration of the consequences of waiting on a specific debt. If the consequences of waiting are too high, push it forward.
It gets more complicated when you take into account student- and other low-interest loans. The interest on my student loans is lower than our investment returns (and is tax-deductible), so contra Ramsey, we invest while making minimum payments. Also, I still have a penalty-free deferral opportunity, so if I lose my job, I can lose that bill, with less financial consequence than other kinds of debt.
But in general do you mean that Ramsey's only for people with money problems? ("Makeover" in fashion doesn't necessarily mean there's a problem.) And while I agree that there are people with money problems that don't realize it, part of David F's and my criticism of Ramsey is he categorizes too many people as having money problems.
I agree that it is a behavioral problem as well as math problem.
The thing is that Ramsey's formula works for people who can't handle complex calculations. IE they can't handle the math. So you stick to the foundation points. But you can do better on top of a stronger foundation if you know how to engineer it, rather than stick to the “standard plan”.
When you actually look deeper into the math focusing on optimization of your resources, you get to really and truly look at the values, pressures and goals that create those behaviors. You HAVE to look at the reasons that go you where you are. From that understanding you can make some solid behavioral changes that come from you, not a generalist financial preacher. This might be what bugs me about Ramsey, he tells you “THE WAY”, and sells you a plan, follow his values and his views to the land of happiness. As Rebekah points out, according to Ramsey, everyone should follow his plan and buy is books and seminars.
You still have to fix the foundation behavioral problem.
The way one spends is a product of the way one approaches allocating their resources. I agree with Suze Orman on this. This is based on various pressures from needs, wants, fears, expectations (advertising), past training, personal values and social ethics.
Ramsey tells you what your goals and morals should be.
I like the harder path of honestly looking at the drivers of what is causing this to happen so you can take a reasoned focused approach to doing what you are doing, so you know why and that it matches who you are, not who another things you should be.
You have to stabilize your spending below your inbound resources. (Time & Income).
You have to have a plan that keeps you on budget and should create a path to your big and little goals. That plan can be out of a book, predefined like a fad diet plan, or tailored to your real requirements.
Like any lifestyle change you have transition into a new way of living to achieve your long term goals. To do that day in and day out you have to have an almost evangelical focus or a method that fits how you really work.