Category Archives: Debt

Someone Tell Me: Why Do People Take Out Long-Term Car Loans?

There are many people who simply have a love affair with cars.  Frankly, I like cars too.  The difference between a really nice car and a functional, no-frills car can be pronounced.

That being said, I have a practical, basic car I bought used a few years back.   I could have taken out a loan and bought something really nice, but it’s not a need.  Rather, it would have been something I simply wanted.  There are other things that can be classified as needs as well, so why burn through available funds on a nice car?

Even more perplexing: why take out a long-term loan to buy car you really want but don’t need?

Let’s say a person has $10,000 in cash available to buy a good enough used car.  Obviously this won’t be anything upscale, but suppose it’s in good enough shape to last 4 years.  Your effective annual cost is $2,500.

On the other hand, let’s say you buy a brand new car for $20,000 but it can last 8 years.  You’re still looking at an effective annual cost of $2,500.  So, might as well buy a new car, right?

Here are 2 things that I think come into play when many people make such decisions:

  1. Loan costs.  There is a cost to them.  So, the second example isn’t going to have the same cost.  Keeping in mind that the person only had $10,000 up front, the other $10,000 would have to be borrowed.  Thus, interest charges will likely occur.  However, many folks don’t think of this to the extent they probably should
  2. Payment procrastination.  If payment isn’t required right away, it’s almost like people don’t feel accountable for their actions.  That is, until the payments drag on.  But that initial feeling, I suspect, causes folks to feel like they can buy way more than what they actually can afford.  So that $20,000 financed car might end up being a $35,000 financed car.

There’s no way around it, we can only buy what we can afford.  Sometimes, it can be necessary to take out some kind of loan for a car.  If someone can’t take any public transportation, has kids, etc – you need to have wheels depending on where you live.  In such cases, I can see how a short-term loan for a modest vehicle can be a no-brainer.

However, doesn’t it seem like many car loans are for cars beyond what a person really needs?  As in, way more than what a person needs?

I say that paying all cash for a car is a nice way to handle this.  What you have allocated for a car, through diligent saving, is what you can spend.

Readers:

What do you think about paying cash for a car vs. taking out a loan?

Do you agree that it’s best to pay cash and only take out a loan unless necessary?

Or, do you think that a car loan for a new car that the buyer really likes is totally normal and just a standard course of action?

12 Get Out of Debt Tips

The older I get, the more I realize how important it is to stay away from debt.  Nobody wants to be living in what amounts to economic servitude to another person!

Yes, it’s better to work toward taking care of our true needs first, rather than make someone else rich. Also, we can instead focus on things we want.  Personally, I think that financial freedom is a good goal.  But hey, whatever it is you aspire to, it has to be more fun than spending money on paying down debt!

Along those lines, I’ve already written about how to avoid debt.  There are a number of things we can do with our financial lives that can help us prevent getting into debt in the first place.  When it comes to managing debt, I think that’s the first and best step: not getting into it!

But what if you or someone you know is already in debt?  Januarybe the aforementioned tips for preventing debt can work in the future, but there need to be steps taken today.  To help with that, I’ve assembled with tips on how to get out of debt:

  1. Think about your aspirations for your life.  Realize that it will be hard to achieve many of these while being stuck paying debt, so use this to fuel your motivation.
  2. Know your debt. Fully document all the debt you have – how much you owe, and how your payments are scheduled going forward.
  3. Analyze your expenses.  Knowing how you spend your money can help you understand where you can spend less going forward
  4. Pay off debt based on interest rate.  If you have debt that’s at a high rate, pay it off sooner.
  5. Move to lower interest rate cards.  Don’t make this a habit of course, but it’s one way to take advantage of lower rates to get some short-term benefits.
  6. Negotiate certain bills or rates.  Actually, this could be done other times than when in debt, as some expenses can be lowered by bargaining (potentially even  certain health care bills from what I understand).
  7. Make a budget – and follow it.  Discipline is key.
  8. Eat at home.  It’s generally cheaper, saves money in the short-term and might save money in the long-term in terms of health
  9. Keep healthy.  Speaking of health, it can get expensive to be sick – so do what you can to keep good habits with fitness and sleep, beyond what I mentioned in #8 above.
  10. Make it automatic.  Not everyone will agree with this, but making automatic payments to reduce debt can take out the temptation to spend excessively and limit available funds
  11. Earn side income.  Start a side hustle, it just might provide you with some extra funds that could accelerate the repayment of your debt.
  12. Have a documented plan.  Set a deadline or goal for having your debt paid, and create milestones along the way – and put in writing for yourself in order to keep accountable.

Readers, do you have any thoughts on these tips? Any others to add? What worked for you in terms of paying off debt – if you had any?

How to Avoid Debt

For some reason, tons of people find themselves in debt for whatever reason.  Once incurred, this debt can prevent people from building wealth and reaching bigger life goals they want for themselves.

In some situations, debt is simply unavoidable.  Many people have no choice but to incur some debt to get by.  However, I think many if not most people get into debt when they really didn’t have to do so in the first place.  At least, not to the extent that they do.

Here are 5 tips on how people can avoid going into debt in the first place:

1) Be very careful when selecting a college and taking on student loans

Now, for many people student loans are a necessary part of going to college.  I’ll maintain that an undergraduate degree is simply a requirement for many things these days and is probably what a high school degree was a generation ago.  So given that a person really needs one (and should consider graduate school as well), it’s important to go to a school that will provide you with the education and marketability you need to make money and build a career.

Oh, and it will important to pay off student loan debt too.  Really, to a large degree this is determined by both the ability of the person to build that career through employment, as well as the cost of the education itself.  Finding that balance between cost and payoff is important in assessing the value of the education.

Hopefully, parents are financially literate themselves and can help.   Otherwise, it’s up to a young person to make a wise decision on the choice of school.  This plays a role in avoiding long-term debt and setting the foundation for a sound financial life.

2) Don’t worry about keeping up with the spending patterns of others

It’s a well worn saying, referring to worrying about what others have and do as “keeping up with the Joneses“.  Well, there is no need to do so.  Just because somebody else has a better home, better car, better clothes, and better vacations doesn’t make that person more successful or happier.  That same person January not be saving much money and might actually be financing much of this life.  Yes, with debt.

On the other hand, the person living a much more modest lifestyle might be avoiding debt and saving more money.  Also, it’s a better way to get to financial freedom.  It’s not like living a more modest life is a tradeoff, giving up a better life.  Rather, it’s living a life that one has earned versus a life one hasn’t earned.

3) Know how you’re spending your money

To really understand your spending habits, it helps to track expenses.  There are plenty of money management systems out there, with a slew of websites and apps out there to help you.  Or, you could simply use a good old fashioned spreadsheet.  Either way, it’s a good idea to understand your spending habits so you can see where your money is actually going.

4) Make sure your income exceeds your expenses

This isn’t always possible for everybody in every possible situation.  There are times in life where this can be tough to do.  However, we need to get past those times as quickly as possible.   Figuring out the difference between what we truly need and what we want is vital to making this happen.  Not to mention, it’s critical to wealth building!

5) Imagine not being able to retire

Yes, this is the case with many people.  Unfortunately, very few people can work very late into life no matter what they think.  The longer someone is in debt, the later in life that a nest egg can actually be built.  It takes time and the power of compounding to really build net worth.

Wouldn’t it be much easier to have chance to have an easier time later in life.  Being older and not able to retire doesn’t seem like a fun way to spend those years, when we have less energy to being with!

Readers, what do you think about these ways to avoid debt? Do you see these as being helpful guidelines and motivation to bypass debt and focus on solvency and building wealth instead?  I know there are other tips people might have – please feel free to share 

6 Tips for Avoiding Debt Throughout Life

Most personal finance bloggers seem to be anti-debt, at least to some degree. Some people think that some debt is okay, and that might be true in some cases.  For example, borrowing money to finance a good college education, or a graduate degree.  Of course, not every program is a good investment, which is another post for another time.  But really, the bottom line is that outside of certain debt, most of it we should try to avoid if possible.

I’m not pro-debt, that’s for sure!  Along those lines, I’ve got 6 tips here for how we can avoid debt during our lives.  Here goes:

  1. Be able to distinguish between what you want, and what you truly need – and then, act accordingly.  It’s great to pursue our dreams and have the life we want.  The thing is, if we do so using other people’s money, it can really come back to get us later.  Best to be able to first take care of what you need, and then consider what we don’t need but really want.
  2. Build an emergency fund.  Keeping a fund can ensure that are covered during times of financial distress. This could include job loss, illness, disasters, or some other calamity.  These things do happen, we just don’t know when and how they will take place.
  3. Spend less than we make.  This one should be common sense, though realistically everybody has a different life situation.  What might be a simple, no-brainer for many people might be incredibly challenging for others due to their current circumstances.  Regardless, we should strive to increase the gap between income and expenses.
  4. Pay off credit cards on time.  The idea of carrying credit card balances just seems so normal to so many people.  I think that unless it’s absolutely unavoidable – and  basic needs can’t be met due to financial distress – try to avoid carrying credit card balances.
  5. Control our emotions when shopping.  Some people just let emotions get the best of them when shopping.  Having self-discipline can be great not only for finances, but for other aspects of life as well.  Logic can be a great antidote for excess emotion when shopping, and an essential part of financial success.
  6. Be thankful.  Yes, there is often much to be thankful for.  Even though we often see others with more money or material items, there are others who have a lot less. Besides, who cares about The Joneses anyway?

Readers, do you practice any of these tips for avoiding debt? Do you have any others?