Good Debt, Bad Debt: Knowing The Difference Can Save Your Financial Life - Rilegato

Hanson, Jon

Rilegato

ISBN 10: 1591840732 ISBN 13: 9781591840732

Casa editrice: Portfolio, 2004

Riassunto

A lighthearted guide to debt management explains the difference between good debt and bad debt while arguing that specific forms of debt may be financially beneficial, in a volume that shares personal stories and original cartoon illustrations to cover such topics as emotional spending, home buying, and retirement. 30,000 first printing.

Su questo libro

L'autore:

Jon Hanson lectures to audiences of all sizes on personal finance topics. A twenty-four-year veteran of the real estate business, he is now a full-time writer and public speaker.

Estratto. © Riproduzione autorizzata. Diritti riservati.:

Introduction:
A Matter of Life and Debt

Never itch for anything you aren’t ready to scratch for. —Ivern Ball

It is hard to fit yourself for joy while spending money on temporary happiness.—Jon Hanson

How are you doing?
How are you really doing?
Are you financially fit or financially spent?
Are you scratching it up or stacking it up?
Are you living the life you imagined—or an unimaginable life?

In America we have both enjoyed and abused the privileges of our society. Yet many are experiencing an implosion of insecurity and vagueness of purpose that leaves them vulnerable to clever merchants seeking to plunder their infant wealth.

Just what are you working for? A quick test: Take your net worth and divide it by the number of years you have worked. What’s your result? Seem lower than you thought? This number is how much you are working for per year. The rest is gone, burned up, consumed. It has gone to burn rate, which is described later in this introduction and in Chapter 3. There are other important measures of wealth, such as income, but you’ll soon find that income and net worth like to hang out together. If your net worth is $100,000 and you have worked for ten years, you are effectively working for $10,000 a year, even if your actual income is $75,000 a year or more. Don’t feel bad. With bad debt, some are working for room and board only; others have a negative net worth.

Certainly life is more than getting and spending money, but because money does necessarily and inescapably affect so many areas of life, it is the main focus of our attention in this book. Good Debt, Bad Debt is not about living a starved or pinched existence. It is about gaining perspective and right-sizing spending and saving while keeping retirement aspirations in line. It is about developing a philosophy of debt—or, for many people, a philosophy of no debt. Good Debt, Bad Debt encourages us to avoid the consumer entitlement mentality that can only lead to debt, regret, and broken dreams—not to mention a garage and basement full of junk.

What Good Debt Is

Good debt increases your net worth. Good debt helps you make money; the use of good debt adds to current earnings, net worth, or foreseeable earning ability. On the other hand, bad debt decreases your net worth. Bad debt takes your money. Payments on bad debt reduce cash flow. Compare:

good debt
. Earns its keep
. Increases your net worth or cash flow
. Secures a discount that can be converted to cash or net worth
. Creates a leveraged position with a strong margin of safety
. Examples: debt for real estate at a safely leveraged level, debt for education that can be applied for a return of capital, debt for a business you are competent to operate

bad debt
. Is typically for consumption
. Decreases your net worth or cash flow
. Absorbs future earnings
. Examples: car loans that rob
your retirement fund;
continuous credit card debt

What Good Debt Isn’t

It’s easy to rationalize anything we want to do with our money. Advertisers even train us to overcome our own objections! We have all done this; I have done it many times in my life. Whether your excuse is to feel better about yourself or the catch-all “I deserve it,” the fact is that rationalizing debt and calling bad good does not change the reality of your financial position. Stacking bad debt on a good asset does not make it a good debt.

Stacking bad debt on a good asset does not make it a good debt.

Refinancing of personal residences has become a popular sport in America. It can be good, if done for the right reasons. The problem is that many people refinance to pull out cash or lower their payments, only to increase their debt with their newfound cash flow. For many, it only means freeing up their credit cards to be maxed out once again. Then they have all of their old credit card debt on their home and a new stack of debt beside it to contend with. Some believe that all debt on real estate is good debt. That is insane. Some lenders are willing to go 110 percent of value on real estate, so without discipline, disaster lies ahead (for both the lender and the borrower). Unless you have a real change of heart and discipline, do not stack credit card and consumer debt on your home equity. If you are considering consolidation of bad debt that will encumber home equity, please read the white paper Debt Warfare first. Get it free at www.gooddebt.com.

Monkey See, Monkey Do?

Some Americans are beginning to question the popular notion (fomented by advertisers and popular culture) that everyone must pursue his or her own inclinations, regardless of the damage to self or society. We are seeing the result of promiscuous spending, easy credit, and, in the end, skinny or nonexistent retirement plans. Too often, debt becomes a weapon that we unwittingly turn against ourselves.

We are seeing the result of promiscuous spending.... Too often, debt becomes a weapon that we unwittingly turn against ourselves.

In The Millionaire Next Door, Thomas Stanley and William Danko discovered that average self- made millionaires save or invest 15 to 20 percent of their disposable income. In The Overspent American, Juliet Schor found that average Americans spend 18 percent of their disposable income on consumer debt payments while saving little or nothing. In this sad juxtaposition lies a key premise of Good Debt, Bad Debt: “The past is the past—unless of course you still owe for it.” Many can’t start up the hill of financial freedom because they are carrying a backpack full of debt.

This would be obvious if only we could step back for a moment and look at how we allocate our income. Madison Avenue and the merchants of debt heap the polite fiction “you can have it all” and “you deserve it” upon the average consumer thousands of times each day. The goal of Madison Avenue is to distract you while the merchants of debt pick your pockets.

In a recent radio broadcast Alistair Begg said, “Our society thrives on materialism, cashing in on the sin of covetousness. Its modus operandi is to create within our hearts a longing for the things we do not have. Not only a longing, but also an attitude of need and entitlement. We need it. We deserve it. Especially if someone else has it.” Of course, we have free will (to a certain extent). It is up to us how we respond to messages from Madison Avenue.

Fat, Old, and Broke

Isn’t it amazing, at least for a time, how resilient our bodies and our finances are? Eventually, though, poor eating and poor financial habits begin to take their toll. In the book Good Fat, Bad Fat, Drs. William Castelli and Glen Griffin counseled readers to distinguish between types of fat that clog the arteries and those that are not harmful. In Good Debt, Bad Debt, I counsel readers to engage in similar discernment as to consumer debt. The statistics on obesity are eerily similar to the statistics on debt problems. The Employee Benefit Research Institute and the American Savings Education Council report that 66 percent of Americans are unable to save enough for retirement because of current financial responsibilities (debt). Peter Jennings, in a special report on ABC News, said that 66 percent of us are overweight. Let’s hope the two groups aren’t the same people. Being fat is bad enough. Being fat, old, and broke is even worse.

The buildup of cholesterol in our veins is barely noticeable until the restricted blood flow begins to cause problems. Many people go for years with cholesterol-clogged veins, never realizing the problem until it is too late. For some, a stroke or heart attack may be the first warning. For others, death is the first warning.

A similar process operates in our finances. So long as we have enough blood flow, er, cash flow to pay the bills, we don’t see a problem. But in the background, too much debt, like too much cholesterol, looms as the number one killer of wealth and possibility. Once we begin to clog our financial arteries with bad debt, we may experience shortness of opportunities and high debt pressure. Unchecked, this may lead to financial death or at the least a financial infarction.

Debtabetes

In The South Beach Diet, Dr. Arthur Agatston writes of becoming healthy and fit through eating the right foods and balancing good carbs and bad carbs together with good fats and bad fats. In Good Debt, Bad Debt, I am advocating financial health and fitness through balance of good debt and bad debt. Agatston speaks of “a silent, so-called metabolic syndrome (prediabetes) found in close to half of all Americans who suffer heart attacks.” I sense a similar development in many Americans’ finances, perhaps a financial prediabetes syndrome. Let’s call it pre-Debtabetes. Debtabetes is the inability of the body to break down and eliminate debt because of insufficient cash flow. Debtabetes is most common in the debt-obese and is closely linked to financial strokes—either fatal or temporarily debilitating. To carry the analogy a little further, we could consider spending as your glycemic (blood sugar) index and cash flow as your financial insulin. To be physically fit and financially fit requires awareness and implementation of many similar skills.

Debt Philosophy

Mr. Jim Rohn asks a great question of his audiences: “If we took your philosophy of life, and got it all down on paper, would you be excited about traveling all over the world giving talks on it?” If not, he suggests, you start there—reworking your philosophy. I labored over Mr. Rohn’s challenge for months. In fact, it was the driving force behind completing this book. I ultimately wanted a book I could hand to my children and say, “Here are my core financial beliefs—they are as fundamental and as sure as gravity.”

Many financial books present supplemental, not fundamental, principles. Financial failure begins in the thinking process before the actual spending. George Orwell said, “People can’t write clearly because they can’t think clearly.”...

Su questa edizione

• Editore: Portfolio
• Data di pubblicazione: 2004
• ISBN 10: 1591840732
• ISBN 13: 9781591840732
• Rilegatura: Copertina rigida
• Numero di pagine: 252