I’m going to get this right out in the the open. Debt is bad.
Now I know some of you are already thinking, “yeah, but what about my home equity line of credit, that isn’t so bad. I took that out to make a home improvement which is contributing to the overall value of my house.”
Others might be thinking, “yeah, sure it’s bad but it’s just a way of life. How else can I afford a brand new car every few years? Carrying a car note is a part of my monthly expenses.”
Last but not least, some of you are thinking, “well, my home mortgage isn’t bad, heck, the interest is a great tax write-off!”
For all of these scenarios (and more) taking on debt just increased the price of what you wanted so you could have it now. You are taking money away from your future self. So yeah, I’ll say it again. Debt is bad.
Now for those that know me, you probably know that I’m a realist and some debt might be worth taking on. For example, I believe that taking on a responsible mortgage is okay. Now, it’s still debt. You will wind up paying way more for that house when you factor in the amount you pay for the interest of the loan. But it isn’t nearly as bad as credit card debt, student loan debt or most car loans.
So how do we pay for big ticket items without taking on credit card debt or even a car loan? In the rest of this article I’ll cover some strategies of how to buy expensive items without feeling irresponsible or ignorant.
Learn the power of time
I’ve been enjoying taking my son skiing to our local non-profit mountain. Lift tickets don’t cost very much, he skis free and we always pack some snacks. (Okay in full disclosure, my son is such a picky eater he wouldn’t eat much of the lodge food anyway, so the brown bag lunch is a requirement for us.) So we have this hobby we like doing together. It’s great. We spend quality time outside, we have fun and we are making some great memories. But recently I’ve been really wanting a new pair of skis. I bought my current pair about five years ago and I picked them up used. Now while they aren’t like the ancient skis my dad used to have with old cable bindings, they aren’t too fancy either.
Like most people, when I get this inkling of an idea, I head to the internet for research. How much would a new pair of skis cost? What kind should I get? After narrowing it down to a pair of “all-mountain” skis I was almost ready to hit the buy button. I was picturing myself hitting the slopes and hopping onto the slide box and doing a 180 at departure and skiing away backwards (because my new skis would be “twin tip” so I could easily ski forward or backward).
But I didn’t hit the buy button. Instead I thought about how the current skis I have still do their job. They get me down the mountain and I still have a ton of fun.
Certainly though, someday I’m going to want a new pair of skis. So how am I going to get there?
Here is where time is your friend. I need to start setting aside some number of dollars each month that are for my new skis fund. I’ll have to prioritize this with the rest of my family’s finances. After enough time, that money will be there and if I still feel a new pair of skis needs to be had, then I can buy them, guilt free and debt free.
This story about skis is just one example. Delaying gratification works for any purchase. You can save up enough cash to buy a car. In fact, chances are you should be saving money for your next car purchase right now. So when your current car dies, you won’t be in a scramble to get a new one, and by scrambling, I mean taking out a car loan.
Hunt for value
Sometimes you can get big ticket items at a pretty good discount. I know for many new skis might not quality as “big ticket,” but we can still apply the same thinking. Before I go out and buy those new skis, how might I be able to save on them? Well in doing some research I learned every year there is a local (and popular!) ski swap. A ski shop not far away has skis on consignment and if I decide I want brand-new, there are always stores like Sierra Trading Post that usually have a pretty good discount.
If you need to buy a car, there are numerous tactics for negotiating the price down. So many tactics in fact, I won’t turn this into a car buying guide. Instead though, consider whether you really need a new car. Cars depreciate faster than a lead-free sinker in loon habitat. As soon as you drive that brand new car off the lot, you lose up to 11% up of the value. It’s hard to argue you got a good deal when that happens.
So instead of buying a brand new car, think about buying a car slightly or even moderately used. Depending on your budget and tastes you can still get close to exactly what you want and save some serious money.
Home buying tips
I’m not going to argue that everyone should pay cash for a house, that just isn’t realistic for a lot of want-to-be home owners. Now, if you have the cash to do it, I won’t tell you not to either. It’s just that most people can’t afford an all-out cash purchase.
So this section isn’t so much on how you can buy a home without any debt, it’s more about some tips and ideas to make buying a house more affordable.
Private Mortgage Insurance is insurance you must buy if you don’t have 20% of the cost of the home for a downpayment. So, let’s say you are looking to buy a house for about $300,000 and you have $45,000 saved for a downpayment. If you can just save up another $15,000 and get your downpayment to that magical 20% number you’ll avoid PMI. If you don’t do that, the PMI for your loan could end up being $3,000 a year.
It’s almost standard these days to think of a home loan as being for 30 years. But most lenders often offer other terms as well, like 15 years. If you can afford a loan with a shorter term you’ll end up saving a ton of interest.
Do you really need it?
Try this exercise. Walk around your house or apartment and look at the stuff you have. For each of the larger items, think about when you bought it and if you are still using it. Be sure to poke through your closet and look in your garage and basement. How many things can you find that you haven’t used in years, if ever. That’s a lot of money spent on things without much in return. I know I’ve been guilty – I’m looking at you QVC popcorn maker! And of course since I use Banktivity, I also know that purchased the popcorn maker for $99 five years ago, ugh!
My point is, many people that are struggling with credit card debt realize they’ve bought a lot of stuff they don’t need or even use. So when you start eyeing your next big ticket item, regardless of how big or expensive it is, think long and hard about whether this is just going to be another one of “those purchases” – you know, the kind that ultimately end up invoking buyer’s remorse or worse, debt.