Fear debt and more

None of these money principles are really new with me, and you have likely heard them before, but these are the ones that I have personally found to be very good advice, and practical for the average bear. Your mileage may vary.

1) Fear debt. It is a vicious killer, and can become your master in less time than you would believe. It's a mathematical thing.

There are only two things that you can justify buying on credit: your house or your car. You can justify buying the house on credit because everybody has to have one, you'd be paying rent if you didn't, and in truth, it's sort of a savings account / retirement plan anyway. At the end of 30 years (or 15 if you're good and can manage it), you have a house that will make it possible to retire.

You can justify the car because you really need it to be able to hold a job, which also is necessary. If you live in a place that offers mass transit, this doesn't apply. But if you live in Albuquerque, which requires a car for survival, you're going to either buy a car or walk.
Most people are math challenged, and don't realize the actual effect of paying interest, or the wonder that is compounding. If you make the entries on a spreadsheet, though, you can see it as it happens. But let's oversimplify just to make it easy. When you buy a $1,000 item on credit for a year, at 18%, you're paying 1180.00 for that item, and you're paying an extra 180 bucks for the privilege of not having to wait for it. But if you save up for it, and earn only 4% on the money while you save, you only pay $960 for it, as if it were on sale. The difference between buying now and buying later is $230! (It's actually much much more, because the interest compounds, but that takes a spreadsheet to demonstrate.)

And it gets worse. When you do it with a credit card (notice that you can't buy a car or house with a credit card), the terms encourage you to not pay off the balance. The debt grows and grows until you are only able to pay the interest. Now you're screwed, because you have to pay money to the bank, and you get nothing for it. Zilch. To get out of this mess, you have to pay back that debt with large portions of your income. And it isn't easy.

Most people learn this the hard way, and if they're lucky they get to start over with an even balance by the time they reach 40 years of age.

So the folks who save their money get a mathematical advantage over those who buy on credit, without even having to work any harder or earn more money.

Once you master the principle of staying out of debt, there are some neat things you can do with a credit card - but if you can't pay off the balance every single time, with room to spare, don't even try them. I won't list them here. I will only tell you that they involve taking advantage of the enticements that the banks offer you, hoping to get you into their lair, but you fool them by paying off the balance each month - wicked, false, trickly hobbitses!


2) Learn the difference between cheap and thrifty.

You can actually lose money by being cheap. OK, sometimes you can't help it; you have to have a car, and so you buy a junker, because it's the best you can do. But if you can afford to buy a car that is dependable, you should do it.

Here's thrifty: you can go to Kroger's and buy the store brand of many items for a third less than the famous, advertised brand. Why not do it? Now, if you get home, and it really isn't as good (sometimes the case), then go back to the famous brand. Here are some things I no longer buy with the official label anymore, because the Kroger's brand is just as good: Miracle Whip, sandwich sliced ham, sour cream, butter (whipped or otherwise), most canned goods including corn, beets, vinegar, Campbell's soups... the list goes on. Some things, though are best done by the experts, such as canned spinach, Wolf brand chili, and Dr Pepper.

Let's assume you have some money available, and you're going to buy... say, a new TV. How much do you watch TV? If you watch it every evening, and it's your main entertainment, then prorate it. The TV will likely last ten years, but at least five. That's a lot of TV watching, so you should be willing to spend a little more and get a good one in the first place. The same goes for that washer and dryer, the refrigerator, your shoes - you should plan on using them for many hours, and so you shouldn't go cheap. Obviously, you don't need to pay for status symbols - buy quality, buy what you will use. Find the best value.

Incidentally, don't be afraid to bargain, especially when buying an expensive item. When we bought our washer and dryer, we got them to knock off a couple hundred bucks on the deal. If you're embarrassed, try this technique. You go in and ask to see the very cheapest thing they have. Look at it, consider it. Ask about it. Go look at the more expensive things, too, and ask about them. Then go back and look at the cheap stuff again. The salesman and his manager will want you to buy the more expensive one, of course, so as soon as he starts explaining the advantages of the better item, ask him if he would consider sweetening the deal if you were to buy the better item. Often, he will go talk to the manager and come back with an incentive. Honest, it can happen.

3) When you buy a house, seriously consider a 15 year mortgage rather than a 30 year mortgage. Not only will you save 15 years worth of interest, the bank will usually offer a much lower rate, perhaps as much as 2 percentage points. If you can't afford the payments on a 15 year mortgage, you are likely buying too much house.

4) Marry somebody who understands this. If you are considering marriage, discuss the principles of debt and thrift. If he or she doesn't immediately and enthusiastically agree with you that debt is of the devil, slow down the romance. Otherwise, you will have to follow the path to near bankruptcy, then climb slowly and painfully out of the pit of financial darkness, all so that your new spouse will learn the hard way what I just explained in this short little blog.