Llama Money » Debt

Stubborn family member and a BMW

Llama Money — Wed, 20 May 2009 01:41:46 +0000

Recently I’ve been fighting through a situation in my family that simply screamed to be written about. I’m just a bit player in the drama, and perhaps that’s what makes it so painful to watch.

The Phone Call

My wife received a phone call from her brother. Yes, that same brother who helped convince me never to lend money to family members again. We’ll call him Toby, so I don’t have to keep calling him my brother in law. Toby decided to buy himself a car – fantastic! Well, not quite. See, the car Toby wants is a used BMW. I’m not sure of the model, but I’m pretty sure it’s a 5 or 7 series. This car also happens to cost $9,000 ( plus taxes ). While on the phone, my wife asked my opinion. I heard BMW and 100,000 miles, and I said NO, NO, and NO. Buy a Honda or Toyota. Don’t buy a BMW with miles. Through the phone I could already hear Toby’s protests.

The problem

The car costs $9,000 – but Toby’s entire cash savings is $4,500
Used BMM with high miles – repair costs will be through the roof, and there’s no cash cushion here
Since he doesn’t have enough money, Toby will have to finance most of this purchase
Toby has awful credit, so my mother-in-law will be co-signing
Toby has two small children at home ( 2 and <1 ), and his “baby’s mama” doesn’t work.
Toby works in the construction business, and is currently doing small side jobs, nothing full time
Toby is accepting unemployment benefits from the state

Oh my, where do I begin? Toby is convinced that this is the car for him. He can’t afford it, so he’s going to put $2,000 down and finance the remainder. His credit history is plain awful – he can’t finance a pack of gum on his own. Somehow, he convinced his mother ( who has good credit ) to co-sign for him. Even more incredibly, he managed to get her onboard, without having any say in the car he buys.

So the dealership approved the duo for a sweet 13.9% interest rate. Adding up down payment, taxes, and interest, this BMW will end up costing Toby over $11,500. That’s before any repairs, of course, and there will be repairs. And they won’t be cheap. And of course, Toby doesn’t have a cash cushion built up to be able to reasonably absorb any repair costs.

The moral dilemma

I’ll come right out and say it – it is absolutely, 100% morally wrong for Toby to finance a car at this stage in his life. He is currently receiving unemployment benefits every month due to lack of full-time job. That means that his state will be effectively making his car payment every month – exactly how much sense does that make?

It’s our fault

Disregarding my advice to avoid used BMW’s and find a cheap Honda or Toyota, Toby blames my wife and I. Apparently, it seems, we really don’t want him to succeed. Yes, by advising him not to buy an unreliable car that he absolutely cannot afford and should not buy, we’re keeping him from being successful. It reminds me of one of my favorite Bible verses:

The way of a fool is right in his own eyes, But a wise man is he who listens to counsel.

Toby is convinced that this is the car for him, he can afford it , and anyone who disagrees is just trying to hold him back. In many ways, I shouldn’t judge. Heck, I have a huge mortgage and 2 cars financed. But the differences are clear – I have a cash cushion, only 1 child, a sterling credit history ( low rates ), and I have a history of managing my money well.

I don’t want to hold anyone back. I don’t want to keep anyone from enjoying the finer things in life. But I do want to help keep people, especially family, from making stupid mistakes. And that is exactly what Toby is doing – making an awful mistake. Both morally and financially. What say you- am I being overly harsh, or spot on?

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. Stubborn family member and a BMW is a post from: Llama Money

Debt Motivation

Llama Money — Wed, 08 Apr 2009 03:20:56 +0000

Anyone who’s spent any time in the car business, or probably sales in general, knows exactly what debt motivation is. Management is always encouraging salespeople to spend every dollar in their bank accounts, buy new cars, and even buy houses. With all those big payments due every month and no savings to fall back on, the salesperson will be hungry and work harder to sell. That’s the thinking, anyway.

Debt Motivation is a terrible idea

I understand why this idea is used – sales is a cutthroat business, and salespeople need to be motivated. But taking out thousands, tens of thousands, or hundreds of thousands of dollars worth of debt is not going to solve anyone’s money problems. All it does it put you in a tougher financial situation, and gives you a lot more stress. Added stress is the last thing most of us need. My hair is already starting to receed as it is – it would probably all fall out if I had any more stress!

Goal Motivation

You want a new car? Fine by me. I’m not going to tell you not to buy it. But don’t buy it, take on a payment you’re not comfortable with, and hope that you can increase your income enough to get by. That’s completely backwards, and I will tell you not to do that. Adjust your budget, save some big cash for a few months / years. Then make a big, fat down payment on the car you want so badly. You’ve shown that you can afford payments comfortably ( you’ve been making them to yourself ), and your payment will be that much smaller. (Or, if you’re so inclined, save up to pay cash for the whole thing. )

I know, I know. How can a personal finance blogger recommend a car note? Some folks just really prefer a new car, and I understand that. If you do it the right way, you can save towards that goal, and not be negatively motivated. Think of the car as the prize at the end of the tunnel. You won’t have this huge, crushing weight of debt as a prize – you’ll have a shiny new car and little / no debt. Isn’t that a whole lot better?

Obama promises to cut annual deficit in half by 2013

Llama Money — Tue, 24 Feb 2009 01:36:38 +0000

I’ll be quick to clarify – that’s the annual deficit, not the national debt. The deficit is the amount that’s added to the debt in any given year – the debt is the total amount owed. Any year that we run a deficit, no matter how small it is, we’re actually adding to the national debt.

That out of the way, President Obama has set a goal of reducing the deficit by 50%. Now he didn’t set a hard number – so it’s not really clear what he means. The Federal government will run a deficit of well over $1 trillion for 2009. Perhaps in the $1.5 trillion – $2 trillion range. So if his plan is to cut it in half from this astonishing level, then it’s not really all that great of a plan. Our President’s goal is to have deficit of $750 billion – $1 trillion by 2013? Is he serious?

It’s not entirely Obama’s fault

It’s not as if Obama created this mess, after all – he inherited it. However, urging Congress to spend $787 billion on a bill they hadn’t read, and speedily at that, is not exactly a promising sign. Will Obama continue down this path of outrageous spending through his entire presidency? Or will he curb spending, and be praised for having a deficit of “only” $750 billion in 2013?

What we can learn from this

Cutting your spending isn’t enough – if they still exceed your income. You aren’t the federal government, and you can’t borrow money from foreign countries to fund your overspending. Nor can you print it and borrow from the Federal Reserve. All you can do is overextend yourself with loans and run up your credit cards. Eventually the music will stop for you, and your creditors won’t if you cut your deficit in half. The fact is, your debt keeps getting bigger.

Go for the surplus

What you need to aim for every month, every year, is a surplus. That’s a positive number after you subtract your expenses from your income. With a surplus, you can save, invest, and pay off debt. Yes that’s right, a surplus can actually make debt shrink, rather than just grow less quickly. With a continued surplus comes financial freedom – and that’s the goal here, isn’t it? Don’t follow in the footsteps of our government; instead, use them as an example of how not to handle your money.

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. Obama promises to cut annual deficit in half by 2013 is a post from: Llama Money

Fixed 30 year Mortgage at 4% – Would you buy?

Llama Money — Mon, 02 Feb 2009 16:42:13 +0000

The details are a little fuzzy at this point, as they often are with government involvement in financial measures. But the Senate is apparently going to try to push through a bill that will encourage lenders to offer fixed rate 30 year mortgages at a stunning 4%. “If” the bill passes, and “if” lenders actually offer this ( there is no guarantee ) – would you considering buying a house? No matter how you slice or dice it, a 4% mortgage is very cheap money. However, would it be enough to temp renters into buying in this tough market?

I’m thinking as a whole, this mission might fail miserably. Most folks are either scared of losing their jobs, or of house values plumetting even more. Both are very real, very understandable fears. Taking on $200k worth of debt at 4% may not be smart if you lose your job a year from now, or if the home’s value drops to $160k. On the other hand, if you buy at the right price in the right market, and have a reasonably stable job, 4% is going to be tough to pass up.

Don’t forget about refinancing

The lucky few who have equity in their homes ( lucky? Perhaps I should say smart few ) won’t want to forget about refinancing. If you have a fixed rate higher than 4% ( anyone with a mortgage ) , and enough equity to refinance, this could be a relatively easy way to save quite a bit of cash every month, and many thousands over the long term. If the measure passes and is effective, I’ll pursue a refinance. Likely I don’t have enough equity to do so, but I will at least give it a shot to see how it pans out.

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. Fixed 30 year Mortgage at 4% – Would you buy? is a post from: Llama Money

Money as Debt

Llama Money — Tue, 24 Jun 2008 00:28:49 +0000

If you’ve never seen this interesting little video, you must. It’s almost an hour long, which seems like a really long time at first. Once you start watching it though, you won’t be able to pull yourself away. Before you watch it, ask yourself – where does money come from? Nearly everyone will say “the government” when asked such a question. This little video will show you that nothing could be further from the truth.

It really makes you see money and finance in a totally different way than you did before. In fact, it’s time for me to do some thinking myself.

Leverage can be intoxicating

Llama Money — Mon, 28 Apr 2008 23:54:35 +0000

I’ve never been a big fan of real estate, though I have written about the topic recently. Over the past few weeks I’ve considered the power of leverage in other areas besides real estate- such as my business. For the past 2 1/2 years I have been running a small business in my spare time. While it has been fairly successful, it is certainly not profitable enough to quit my day job.

Enter leverage

My business has the potential to be very scalable. All I have been lacking is the time and the capital. What if I take out the small business loan to provide myself with the needed capital? With this capital I will be able to scale my business to create a full time income. This would, of course, eliminate the need for me to have a day job. One of my long-term goals is indeed to stop working for “the man.” Besides being a hassle, there is limited upward potential when you work for a company.

The risk is enormous

What would I risk by taking out a huge loan? Oh, nothing much. Just a great fulltime job, my family’s well-being, my retirement savings, and my perfect credit history. In other words, just about everything. The risks are huge, but the potential rewards are even bigger. I just need to remind myself not to get carried away. If I go forward with this, I need to make sure that my risk is minimized, and I do everything possible to be successful. The next few weeks will be full of deep thought.

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. Leverage can be intoxicating is a post from: Llama Money

Working today for what you bought yesterday

Llama Money — Fri, 11 Apr 2008 09:30:34 +0000

I’m tired of paying today for what I bought yesterday. What am I talking about? Well in a word, debt. When I make monthly payments on my credit card, both cars, and mortgage, I am essentially paying for things I bought yesterday, last month, last year. Instead of saving what I make today, I am busy spending it on what I already purchased. This gets tiring after awhile… working so hard and having little savings to show for it.

Breaking this cycle

I can already tell that it will be exceedingly difficult to break this cycle. All the while I’m paying off these debts from yesterday, I’m not saving for tomorrow. Once I get to the point of paying off at least the credit cards and cars, likely it will be time to buy again. But since I have been busy paying for my last purchases, I haven’t yet had a chance to save for the replacements. In other words, I’ll be back in the same place that I am today. That’s a place I don’t want to be.

Patience is not an easy thing

The only real solution to this cycle is patience. Once my debts finally get paid off, wait. Don’t make any large purchases for awhile, so I give myself time to save. Only with patience can I stop paying for yesterday’s purchases. That means keeping my cars longer than I ever have before. It means holding off on new furniture purchases. It means not buying a pool. It will be hard, and at times very frustrating. But it’s the only way to move forward, where saving is the choice instead of paying off debt.

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. Working today for what you bought yesterday is a post from: Llama Money

My Financial Priorities

Llama Money — Mon, 07 Apr 2008 09:50:29 +0000

Lately my financial obligations have been really bothering me. When you add everything up, I pay out a lot of money towards debt each and every month. Mortgage, two car notes, credit cards. These all add up to a huge amount of money. So, in the coming months, I’m going to focus more on eliminating debt, and thus eliminating monthly obligations.

Credit Card debt comes first

Besides my daily expenses credit card, I have just $2400 left in revolving credit card debt. Fortunately this amount is at just 0% interest for a few more years. While I know that paying it off slowly would be best from a strict financial point of view, I’m tired of having credit card debt. I should have this paid off well before the end of the year. For the past few months, I’ve been tossing $400 at this card, and that’s why it’s come down from it’s high so quickly. Once it’s paid off, it’s like I gave myself a $400 per month raise.

Working to pay off a car loan

Between my wife and I, we have had a total of 10 cars in our lives. That wouldn’t be bad if we were middle-aged – but we are just 24 and 25 years old! Car payments and negative equity are terms we are intimately familiar with. In fact, I’ve only ever driven one car that I didn’t owe money on. My goal is to stop that trend, and break my habit. I will be making extra payments on my Civic Hybrid with the goal of paying it off several years early. Once my credit card debt is gone, I will have that extra $400 per month to play with. If I put it all on my loan each month, the term will be cut about in half. Once that’s paid off, it’s time to go to work on car loan number two.

I know the end goal is quite a ways off right now. It’s frustrating at times, because progress is so slow. But once I have these three debts cleared, my cashflow situation will be vastly improved, and I can really increase my saving & investing. I’m not in a terrible rush to pay down my mortgage early.. the rate is low ( 5.55% ) and it’s fixed. With little else in the way of monthly obligations, my mortgage won’t be a huge concern anymore.

So anyway, these areas will be my focus for now. I’ll continue to invest, but I won’t step up my investments like I had been planning. Debt first, for me. How about you – are you focusing on debt or investing, and why?

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. My Financial Priorities is a post from: Llama Money

Debt holds you back

Llama Money — Tue, 11 Mar 2008 16:12:32 +0000

I am in debt. Quite a bit of it when you add it all up. Fortunately I don’t have any credit card debt that I pay interest on ( like a lot of people do ), but with 2 car loans, a mortgage, and a 0% credit card, it adds up. The problem is that all this debt means a large monthly financial obligation. When I’m paying X for my mortgage, y for the cars, and z on my credit card, that’s all money that I have to, must, make every single month – or I’ll be in a big pile of trouble. That’s also money that isn’t available for saving or investing – a big problem in today’s world. Very few among us save enough for our futures, and part of the reason is because of our debt load.

If I had no mortgage, no car payments, and no credit cards, I would free up about $2500, each and every month. That is, if I had paid for my home in cash ( and so only had to pay property tax and insurance ), and paid for my cars in cash, I would have $2500 every month to do with what I please. Saving that kind of money can make for a really nice early retirement. Or, I could build a large savings account and have a huge amount of financial security. If my wife or I lost our job, it would not be as stressful, since we’d have a large pile of cash, as well as very low monthly obligations. With our current situation, it could be absolutely ruinous.

Freedom from debt

I don’t expect to be free from my mortgage for a very long time. After all, I just purchased my home in September of last year – I have over 29 years of payments left! However I am aggressively paying down my credit card debt, and then I will focus on my cars. At the same time I will do my best to invest for the future, and for my retirement – though the debt will be my main focus. Once all my non-mortgage debt is gone, a huge weight will be lifted from my shoulders. Money will flow into my savings and brokerage accounts freely, and I won’t feel the same sort of pressures that I do today. If I want to work on my small business full time, it would be a real possibility – something that isn’t true today.

Get by with less

How does one live debt-free? Learn to get by with less. A smaller house than you want is a start. Same thing goes for cars – don’t go for the V6 with all the bells and whistles, or ( blasphemy! ) an SUV. Get a small, fuel efficient car that fits your needs, and no more. Believe it or not, you don’t need the dual sunroof and navigation system – your last car didn’t have them, and your next one doesn’t need them. Pay off your cars quickly if you’re unable to pay cash. Note: I’m not a big fan of buying an old beater car, simply for the reliability factor. You may feel more comfortable driving a junker, but I am not. Don’t finance furniture or other household items – just save and pay cash.

It will take patience

Living debt free will not be easy. No one said it is. You will stumble along the way, and it will be hard. But ultimately the goal is financial freedom and independence. With patience, and diligence, we can all get there. And like the saying goes, there is no better time than the present.